Financial Dictionary

What Is Rate of Return? The rate of return measures the performance of an investment. Rate of return is calculated by dividing any gain or loss by an investment’s initial cost, or the percentage change of the investment’s value in a given period. Rates of return usually account for any income received from the investment in addition to any realized capital gains. What Is the Internal Rate of Return (IRR)? The internal rate of return is used to estimate the profitability of potential investments. More specifically, IRR is the exact discount rate that makes the net present value (NPV) of…

What is Liquidity? Liquidity is the ease and speed with which an asset or security can be bought or sold. What Does Liquidity Mean in Finance? Financial liquidity refers to how easily assets can be converted to ready cash without affecting its market price. Assets like stocks and bonds are very liquid and can be converted into cash within days. Larger assets and tangible items such as property and equipment are often not as liquid since they need to be sold before you can use and spend the cash that they are worth, which can take weeks or months. Cash…

What Is a Benchmark in Finance? Financial benchmarking involves running financial analyses in order to compare business practices and the standards of a firm to other firms within the same industry. A benchmark is a standard, or a baseline, that’s used for comparative purposes when assessing a portfolio or mutual fund. What is a Benchmark in a Portfolio? Benchmarks are used to analyze and manage allocation, risk, and the given returns of a portfolio. They can also be used to assess how a portfolio is performing against different market segments. To track the performance of an asset group, companies use…

Dividend Definition A dividend is a portion of a company’s profit paid to common and preferred shareholders. They provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. How do Dividends Work? Dividends are payments a company makes to its shareholders to share its earnings and can be thought of as rewards paid to shareholders for their investments. There are many reasons why companies pay dividends, including the intent to increase investors’ faith in the company and signal optimism about future growth and earnings. Dividends are…

What Is a Yield Curve? A yield curve is the relationship between interest rates and time, and is determined by plotting the yields of bonds with equal credit quality against their maturities. What Does the Yield Curve Tell You? By looking at the yield curve of bonds having equal credit quality but differing maturity dates, the slope of the curve will give you a good idea of the future interest rate changes and economic activity. Yield curves can take the form of three shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat. A normal yield curve shows yields…