Financial Terms Explained

Compound interest is the interest earned on your initial principal investment plus the interest accumulated over previous periods. Essentially, it is earning interest on top of interest, allowing your wealth to scale exponentially over long horizons.

Liquidity refers to how quickly and easily an asset can be converted into cash without drastically impacting its market valuation. Cash is the baseline for absolute liquidity, whereas assets like real estate or fine art are highly illiquid due to transaction timelines.

Diversification is a foundational risk management strategy that mixes a broad variety of investments within a single portfolio. By spreading your capital across distinct asset classes, industries, and regions, you mitigate the downside risk of a single asset underperforming.

Return on Investment (ROI) is a core mathematical metric used to evaluate the efficiency or profitability of an asset relative to its initial expense. It is derived by dividing net profit by the original purchase cost, represented as a clear percentage value.

Compound interest is the interest earned on your initial principal investment plus the interest accumulated over previous periods. Essentially, it is earning interest on top of interest, allowing your wealth to scale exponentially over long horizons.

A firm that provides start-up ventures.

In insurance, an agreement to an offer of coverage that creates a binding contract.

Trade credit created by a supplier when it permits a client to pay in the future for goods or services that have already been delivered by the supplier. Payables are a common source of short-term financing for many industrial and service companies. A client company is generally required to arrange payment within 7 to 180 days, though in some cases terms may extend even further. In exchange for granting the payment extension, the supplier explicitly or implicitly charges a financing cost.

Powers granted by a principal to an agent to deal on its behalf. Actual authority may be explicit or implicit, and actions taken by the agent are generally binding on the principal.

The cost of replacing damaged or destroyed property, generally on the basis of new cost less DEPRECIATION. Actual cash value determination is the most common method of financial settlement in insurance contracts unless an alternative method, such as full value is specified.

The amount of credit risk exposure in a derivative or financial transaction. Actual exposure is one of two components, along with fractional exposure, in the determination of total credit exposure.

In insurance, the process of modifying the premium rate and reserves to reflect actual loss experience.

The base price used to determine capital gains or losses on an investment, generally including a deduction for commissions at the time of purchase or sale, along with adjustments for any stock splits that may have occurred.

A bond issued as a recapitalization instrument by a company in financial distress, often as an income bond that only pays investors coupon interest as earnings permit.

An insurance contract written by an admitted insurer that is authorized to do business in the state or jurisdiction where the policy is issued.

An insurer that is authorized to write insurance business in a particular state or jurisdiction; the contracts it offers are classified as admitted insurance.

The market for spare parts, accessories, and components for motor vehicles.

Used in the context of commodities or options trading to refer to the month that is furthest away from the contract’s date of settlement.