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Financial Literacy Month: Sink Your “FAANG”s Into Understanding These Financial Terms

| April 27, 2019
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Ready for another serving of investment terminology explained in easy-to-digest terms?

While the alphabet soup acronyms and technical terminology of “finance-speak” can be sometimes overwhelming, terms can sound more complicated than they really are. Let’s break down the following terms to help boost your financial savvy:

FAANG

FAANG is an acronym that combines the first letters of Facebook, Apple, Amazon, Netflix, and Google. These companies were originally grouped together in 2013, and since then the acronym has stuck with investors. The purpose for grouping them together was because of their speculated value as the titans of the tech industry.


Federal Funds Rate

You might not recognize this by its formal name, but rather as the ‘Fed Rate’. The term is mentioned non-stop in the media, but do you know what it really means and how it affects you?

This interest rate is essentially the proposed rate at which banks charge other banks interest for lending each other money from their reserves. The Federal Reserve requires banks to hold a minimum percentage of their total deposits, also known as a reserve requirement, in order to assure security. Any money that the reserve has in excess of the minimum required level is available for lending to other banks. The interest rate that the lender bank can charge is known as the federal funds rate, or colloquially, the ‘Fed Rate.’

Why is the Fed Rate important to the country’s economy?

Short term rates on consumer loans and credit cars are influenced by this interest rate, as prime rates (what banks charge their most creditworthy customers) are based off of the Federal Fund rate. The stock market is known to react very rapidly and vehemently when the Fed announces a change in rate. Typically, the lower the rate, the higher the general stock market moves.

Cash Flow

Defined as the net amount of cash and cash-equivalents being moved into and out of a business. The cash flow of a company is determined from its cash flow statement, one of the three members of the financial holy trinity that also includes the income statement and the balance sheet. Cash flow is a crucial aspect of measuring a business’s liquidity and general flexibility in how it spends its money.

A positive cash flow indicates a company has a high level of liquid assets, meaning it can pay its debts, increase reinvestments, pay money to its shareholders, and comfortably reduce expenses.

A company with a negative cash flow has too much credit, or too many accounts receivable, too much value being allocated in a company’s inventory, too much money being spent on capital expenditures, etc.

Obviously, the higher a company’s cash flow the better, but even profitable companies can have low cash flow if they are only able to make enough revenue to just barely cover their expenses.

Are there other financial terms or concepts you could use a crash course on? Contact me and I will be happy to explain them to you. The more educated you are, the more confident and secure you can feel when making important financial decisions that affect yours and your loved one’s future.
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References:

https://www.investopedia.com/terms/f/federalfundsrate.asp

https://www.investopedia.com/terms/c/cashflow.asp

https://www.investopedia.com/terms/f/faang-stocks.asp

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