Basic money knowledge is vital. It is sad that schools do not have a course on basic finance. No matter what your profession is, one must be aware of the fundamental level financial words. In the modern world of today, we all have to deal with money and bank and it is essential to have the know-how to manage at least your personal finance.
Almost everyone has heard of this word but not all understand the meaning of it. Compound interest is different than simple interest. Say the principal amount is Rs. 100 and the interest for one month is Rs. 10. In the case of simple interest, the next interest will be calculated only on the principal, i.e. Rs. 100. In compound interest, the principal and interest are both taken into consideration, so the next month’s interest will be calculated on Rs.110.
Compound interest is used for your loans and credit cards – so you need to watch out for the money you actually spend. On the good side compound interest is a great investment tool as your money will grow at a faster pace. Understand the value of compounding to manage your money better.
Bonds are also referred as debt investments. These in simple terms mean that you have put your money as a deposit and expect an income flow from it. Actually the money that you invest on that bond or buy a bond, you are lending money to the government or to a corporate organization. So depending upon the type of return you choose, you receive periodic or amount upon maturity.
Stocks, equities and shares are the same. In limited companies, stock gives you ownership of the organization. If you buy the stock of a company, you get a partial ownership of that company. There are shareholder meetings held every year and the company informs you of the profit and losses. As per the ratio of your stock held and the profit earned, you get a sum of money as your return on this investment.
Capital gain simply means how much you have gained in money and returns. It means increase in the worth of an asset or investment. Say you have a deposit with a mutual fund and you get interest on it periodically. If your interest increases, you have had capital gain. Similarly if the value decreases it will be capital loss. You are meant to pay your taxes as per capital gain or loss.
Life insurance and Term life insurance
Life insurance is a very common thing that one hears. You must know that generally what covers the full period of person’s life is called a Permanent Life Insurance. The money that you pay is called premium. This is different than the life insurance that starts generally from 5 years and extends up to 30 years – this is a Term Life insurance policy. If the insured dies within this time the beneficiary gets the amount of money insured and if all goes well, the insurance simply expires. If your insurance policy is meant to give you any cash after policy expiry it will, otherwise you would receive any benefit.
Mortgage and hypothecation
When you take a home loan, it will be mortgage because it is immovable. When you get a car loan it will be a hypothecation as it is movable. There are some more differences, but for a non-finance person knowing this much is sufficient.
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