Finance Keyterms

Wage

Hourly rate of pay

Piecework wage

paid for each unit of work completed

Fair Labor Standards Act

requires that wage earners who work more than 40 hours a week receive overtime pay

Salary

fixed rate of pay

Commission

percentage of the amount made on a sale

Tip

extra money a customer gives for good service

Bonus

extra money an employer gives to workers

Capital gain

increase in the value of an asset you own

Self employed individuals

have their own businesses

Pay statement

record of what the worker was paid

Gross income (earnings)

total amount a worker earns

Net income

amount left after taxes

Income tax

tax on the amount of money you earn from employment

Progressive

people with higher incomes pay higher tax rates

Sales tax

when you purchase items

Property tax

pay on real estate and personal property

Estate tax

heirs pay when they inherit

Mandatory expenditures

expenditures required by the law for the government

Discretionary expenditures

government chooses how much to spend

Financial intermediation

process of transferring money from one person or another

Depository institutions

accept money from customers and put it in accounts for customers to use (banks, credit unions, savings and loans)

Non-depository institutions

accept money from customers to invest or as payment for a service (stockbrokers and insurance agencies)

Bank

common kind of financial institution

Checking account

bank account in which you deposit money

Savings account

in which customers keep the money they are saving

Debit/ATM cards

make cash withdrawals

Safety deposit boxes

storage spaces to keep valuables

Loans

take out money

Overdraft protection

coverage for a check for more than is in your account

Stop-payment orders

request that a check not be paid after its written

Online banking

allows you to manage your account electronically

Commercial banks

owned by investors, make money from interest on loans

Community banks

commercial banks that are locally owned and operated

Mutual savings bank

owned by their depositors

Internet banks

only provide services online

Checkbook register

record of transactions

Bank statement

list of transactions you made that your bank sends to you

Reconciling

your record matching the banks record

Formula

Interest = Principal x Rate x Time

Principal

amount you deposit in the account

Yield

total interest

Compounding

adding interest to principal

Rate of compounding

number of times the bank compounds your interest in one year

Rule of 72

estimates how long it will take you money to double, Divide 72 by the interest rate.

Annual percentage yield (APY)

yearly amount of interest you will get with compounded interest

Certificates of deposit (CDs)

offer higher rates but money stays in a set amount of time

Passbook savings accounts

lower rates

Corporation

large business organization with the legal status of a single person

Proprietorship

business owned by one person

Partnership

business owned by a small group of people

Stocks

shares of ownership in a company that anyone may buy

Dividends

payments to the stockholders

Initial public offering

corporations first sale of stock

Primary stock market

initial public offering

Secondary stock market

trade of stock after its initial sale

Capital gain

sell the stock for more than you paid for it

Common stock

have the right to vote on company decisions, and may receive dividends

Preferred stock owners

receive regular fixed dividends, but do not vote on company matters

Blue chip stocks

stocks from large, well established companies that can withstand economic downturns

Income stocks

from companies that pay above average dividends

Growth stocks

from companies that emphasize long term growth and pay few dividends

Defensive stocks

from companies whose sales tend to remain stable

Cyclical stocks

from companies whose sales are sensitize to economic conditions

Penny stocks

inexpensive but risky because they are from questionable companies

Bond

agreement in which you lend money to a corporation or government

Face value

the principal amount the borrower repays on the maturity date

Corporate bonds

raise money

Municipal bonds

finance government programs

U.S government bonds

most secure bonds

Expansion stage

business activity grows.

Peak stage

the height of expansion but growth is starting to slow.

Contraction stage

businesses slow down and demand falls.

Trough stage

the lowest level of economic activity.

Bull market

time of rising stock prices

Bear market

time of falling stock prices

Rollover

transferring funds from one retirement account to another without paying taxes

Defined benefit plan

retirement plan that makes regular payments

Defined contributions plan

benefits are not guaranteed to last a lifetime

401(k) plan

allows workers to put money in tax-deferred investments

403(b) plans

people who work in non-profit organizations

457 plan

government employees

Roth 401(k) plan

workers makes contributions with money that has already been taxed so withdrawals are not taxed

Traditional IRA

works like a certificate of deposit

Roth IRA

you cannot deduct contributions from your taxable income

Estate

a person’s total assets and liabilities when they die

Will

legal document that outlines what will happen to your property

Living will

statement of instructions regarding medical treatment if a person is hospitalized

Power of attorney

gives another person authority to make legal decisions for you if you are incapacitated

Trust

an agreement that allows another person to administer your assets

Probate

paying someone's debts and dividing his or her asset after death

Executor

a person who handles your affairs of probate after your death

Creditor

lender

Debtor

borrower

Balance

total amount you owe

Minimum payment due

which you must pay for the current billing cycle

Annual percentage rate (APR)

interest rate as well as other expenses a borrower must pay

Closed-end credit

a loan for a set amount of money

Open-end credit

lets a borrower use an amount of credit over a period of time

General purpose cards

issued by financial institutions (visa or mastercard)

Store credit card

good at the store that issues the card