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The ABCs of finance: Terms you should know to empower your bottom line (letters D-L)

Have you ever wished for a pocket glossary when dealing with your finances? Here are some more terms defined to prepare and empower you for savvy conversations surrounding the finance industry. Review letters A-C in case you missed it.

 

Debt/Equity Ratio (D/E): A ratio representing the proportion of a company’s total liabilities divided by its stockholders’ equity, and showing a comparison between debt and value of shareholders’ equity. The D/E ratio is often expressed as a percentage.

To calculate debt-to-equity, divide total liabilities by total shareholders' equity.

Debt-to-equity ratio = total liabilities / total shareholders' equity

Debit Card: A debit card deducts money directly from your checking account for a purchase. This diminishes the need to carry cash and physical checks, and it offers the convenience of a credit card without allowing you to go into debt.

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Demand Deposit: A demand deposit consists of funds in an account that can be withdrawn at any time without advanced notice by the account holder. Most checking and savings accounts are demand deposits accessible through ATM, online banking and a bank teller.

Dividend: The distribution of part of a company’s earnings paid to its shareholders. These can be issued in the form of cash, stock shares, or other assets. There are both one-time and ongoing cash flow dividends.

Equity: A value of shares issued by a company. For example, if you own 30% of a company’s shares, you own 30% of the company’s equity.

Escrow: In a given transaction, an escrow is a financial instrument, usually a sum of money, held by a third party on behalf of the other two parties. The third party holds onto the assets until the terms of the transaction are satisfied.

Face Value: The actual value printed on a coin, dollar bill, banknote, ticket, postage stamp, or other similar item. This is especially important when the face value is less than the actual intrinsic value. For example, an old coin might have five cents printed directly on it, but could actually be worth much more.

FASFA: The Free Application for Federal Student Aid (FAFSA) is a form that can be filled out by both current and prospective graduate and undergraduate students. The form determines a student’s eligibility for financial aid from both federal and state governments based on family contribution and the amount the student is expected to pay out of pocket.

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FDIC: Created in 1933, the Federal Deposit Insurance Corporation (FDIC)’s purpose was to restore confidence and stability in the U.S. financial system by promoting stable banking practices. It insures deposits in the U.S. against bank failure.

Fixed Rate: A type of interest rate on a liability, such as a mortgage or loan, that remains permanent for part of or the entire term. A borrower who feels that an interest rate may rise over the term of a loan is likely to choose this option.

Guarantor: Someone who guarantees to pay for another’s debt if he or she were to default on a loan obligation. If a situation arises in which the original debtor can’t pay, a guarantor acts as a co-signer.

Growth Rate: The amount by which a specific variable increases within a specific time period and context. For example, this typically means the compounded rate of growth of a company’s yearly revenues, earnings and dividends. A company’s growth rate often depends on its industry.

Hedging: Hedging is a strategy used by investors to limit their probability of loss from price fluctuations in commodities, currencies, and securities. An investor takes equal and opposite positions in two different markets to offset the risk of losing everything in one market.

Interest: The cost for the opportunity to borrow money. Interest is usually expressed using an annual percentage rate and is calculated using a simple or compound formula.

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Inflation: The rate at which the general level of prices for goods and services rises and the purchasing power of currency diminishes. Central banks work to limit inflation, avoid deflation, and keep the economy on track.

Insufficient Funds: Also called non-sufficient funds (NSF), insufficient funds occur when an account does not contain enough funds to satisfy the demand of a given payment, such as using a debit card, bouncing a check or taking money out of an ATM.

Junk Bond: A fixed-income security rated below investment grade. An investor purchases a junk bond, but they risk the chance that the issuer may not be able to repay the original principal. A common reason for bonds to receive this low rating is that the issuing corporation is facing financial trouble.

Keogh Plan: A retirement option available to self-employed individuals or unincorporated businesses. It is a tax-deferred pension plan where contributions are tax deductible up to 25% of a person’s annual income up to $47,000. Types of Keogh Plans include money-purchase, defined-benefit, and profit-sharing plans.

Liability: Legal debts or obligations that are paid off or settled over time through the transfer of money, services or goods. Current liabilities are debts payable within the span of a year and long-term liabilities are longer-term debts.

Liquidity: The degree at which an asset can be bought or sold in a market without altering the price. For example, cash is the most liquid asset, while collectibles and real estate are on the other end of the spectrum, closer to illiquid.

See our other guide to financial terms: letters A-C and letters M-V.

Tags: My Finances, Debt Management, Banking