GCSE Finance Terms Explained

Understanding basic finance terms is crucial for GCSE economics and business studies. Here’s a breakdown of some key concepts:

Income and Expenditure

Income: The money received by an individual or business. This can include wages, salaries, profits, or interest.

Expenditure: The money spent by an individual or business on goods and services. This can include rent, food, raw materials, or marketing.

Budget: A plan showing expected income and expenditure over a period. Budgets help manage finances effectively. There are different types:

• Personal Budget: A plan to manage personal income and expenses.
• Business Budget: A financial plan for a company, outlining projected revenues and costs.

Savings and Investments

Savings: Money put aside for future use, typically in a bank or building society account. A key advantage is security, but returns may be low.

Interest: The cost of borrowing money or the reward for saving money. Expressed as a percentage (interest rate).

Investment: Putting money into something with the expectation of future profit. Examples include stocks, bonds, and property. Investments usually carry more risk than savings but potentially higher returns.

Shares (Stocks): Units of ownership in a company. Shareholders are entitled to a portion of the company’s profits (dividends) and can potentially profit from an increase in the share price. Share prices fluctuate based on company performance and market conditions.

Bonds: A loan made by an investor to a borrower (typically a company or government). The borrower agrees to repay the principal amount of the loan plus interest over a specified period. Bonds are generally considered less risky than stocks.

Borrowing and Debt

Loan: An amount of money borrowed, usually from a bank or other financial institution. The loan is typically repaid over a set period with interest.

Mortgage: A loan specifically for purchasing property. The property serves as collateral for the loan.

Credit Card: A card that allows you to borrow money to make purchases. Credit card debt can be expensive due to high interest rates.

Interest Rate: The percentage charged on a loan or paid on savings. Higher interest rates mean borrowing is more expensive and saving is more rewarding.

APR (Annual Percentage Rate): The annual rate charged for borrowing, including interest and fees. It provides a standardized way to compare the cost of different loans.

Financial Institutions

Bank: A financial institution that provides a range of services, including deposit accounts, loans, and payment processing.

Building Society: Similar to a bank, but traditionally focused on mortgage lending and savings accounts.

Insurance Company: A company that provides financial protection against specific risks, such as accidents, illness, or property damage.

Other Important Terms

Inflation: A general increase in prices and a fall in the purchasing value of money.

Gross Profit: Revenue minus the cost of goods sold (COGS). It represents the profit a company makes from its core business activities.

Net Profit: Gross profit minus operating expenses (e.g., rent, salaries, marketing). It represents the company’s profit after all expenses have been deducted.

Revenue: The total income generated from the sale of goods or services.

Cost of Goods Sold (COGS): The direct costs associated with producing goods or services sold.

Understanding these terms provides a strong foundation for studying finance at the GCSE level and beyond.