I had invested very little time to learn about “Money” in the past. But recently I wanted to write about “complexities of handling money in software development”. That led to reading about origin of money, rules and regulations, and to some extent how money works!

As a result, I will share with you what I have learned in multiple posts, and here is part 1: some common words and their meanings e.g Fiat Money, Bond, Fair market value vs net market value, strike price, call vs put, etc.

Definitions

IOU: I owe you. Informal document acknowledging debt.

Fiat money: Fiat money is a type of currency that has value because a government says it does. It is not backed by a physical commodity like gold or silver; instead, its value comes from the trust and confidence that people have in the government that issues it. Examples of fiat money include the US dollar, the euro, and the Japanese yen.

Fair market value vs net market value: fair market value is what something is worth in an open market, while net market value takes into account any debts or liabilities associated with that asset to give you a clearer picture of what you’d actually receive if you sold it.

Intrinsic value: Value calculated on simplified assumptions. In finance, the intrinsic value of an asset or security is its value as calculated with regard to an inherent, objective measure. The asset’s price is determined relative to other similar assets.

Purchasing power: Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would be the case today, indicating that the currency had a greater purchasing power in the 1950s.

Strike Price: In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set by reference to the spot price, which is the market price of the underlying security or commodity on the day an option is taken out. Alternatively, the strike price may be fixed at a discount or premium.

Moneyness: Moneyness is the value of a financial contract if the contract settlement is financial. More specifically, it is the difference between the strike price of the option and the current trading price of its underlying security.

Depreciation: Depreciation is the decrease in the value of assets and the method used to reallocate, or “write down” the cost of a tangible asset (such as equipment) over its useful life span. Businesses depreciate long-term assets for both accounting and tax purposes.

Residual Value: Residual value, also known as salvage value or scrap value, refers to the estimated worth of an asset at the end of its useful life. It’s the amount of money you could expect to receive if you were to sell or dispose of the asset after it has been fully depreciated or used up. Let’s say you buy a car for $30,000. You plan to use it for five years before selling it. At the end of the five years, you estimate that you could sell the car for $5,000. In this case, the residual value of the car is $5,000.

Security: In finance, a “security” is a financial instrument that represents some type of financial value. Think of Security as anything that can “secure” some financial value.

Commodity: A commodity is a basic good or raw material that people buy and sell. Examples include things like oil, gold, wheat, and coffee. Commodities are often used to produce other goods or services.

Call vs Put: A call option gives you the right to buy an asset at a predetermined price, while a put option gives you the right to sell an asset at a predetermined price, both within a certain period of time. Price of the option needs to increase for the call option to be profitable, and decrease for the put option to be profitable.

Option: In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option.

Nominal income vs Real income: Nominal income is the amount of money you earn in dollars, euros, etc, while real income tells you what your income can actually buy after considering changes in prices or inflation. So if you get a 5% raise, but inflation is 10%, your real income has actually decreased by 5%. So if your nominal income is $50,000 after raise your nominal income will be 52,500, and because of the 10% inflation, your real income will be $47,250.

Fungibility: Fungibility is the ability of something to be easily exchanged or replaced with something else of the same kind. For example, money is fungible because you can swap a $10 bill for another $10 bill, or even two $5 bills, and it still has the same value. Goods that are fungible are treated as commodities, and markets in commodities are active and liquid because of their fungibility. Or for example, gold is generally fungible because its value does not depend on any specific form, whether of coins, ingots, or other states.

Asset: Economic resource, from which future economic benefits are expected. In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).

Tangible assets: In law, tangible property is literally anything that can be touched, and includes e.g machinery, vehicles, land, equipment, and inventory.

Intangible assets: An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as any form of digital asset such as software or cryptocurrency.

Goodwill: Intangible asset recognized in the acquisition of a firm. Goodwill in accounting refers to the intangible value of a business that goes beyond its physical assets and liabilities. It represents the reputation, customer loyalty, brand recognition, and other positive qualities that make a business valuable.

Current assets: Current assets are all assets that can be converted into cash within a year. Examples are cash, accounts receivable, and inventory.

Fixed assets: Fixed assets are long-term assets that are not expected to be converted into cash within a year. Examples are land, buildings, and machinery.

Capital Expense: Capital expenditure or capital expense (abbreviated capex, CAPEX, or CapEx) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.

Operational Expense: (abbr. opex) Ongoing cost for running a product, business, or system. Examples are rent, utilities, and salaries. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex.

Liquidity: In finance, something is considered “liquid” if it can be quickly and easily converted into cash without losing much value. For example, money in a savings account is liquid because you can withdraw it and use it right away. Stocks are also fairly liquid because you can sell them on the stock market quickly. However, things like real estate or rare collectibles are not very liquid because it can take a long time to sell them for cash.

Mortgage: A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged.

Lien: A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation.

Unsecured Debt: In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment.

Euribor: EURIBOR stands for Euro Interbank Offered Rate. It’s the average interest rate at which a large panel of European banks borrow funds from one another, denominated in euros. EURIBOR serves as a reference rate for financial products such as loans, mortgages, and derivatives. It’s calculated daily and published by the European Money Markets Institute (EMMI). Banks use EURIBOR as a benchmark to determine interest rates for various lending and borrowing activities within the Eurozone.

Bond: A bond is a type of investment where an investor loans money to an entity (such as a government or corporation) for a defined period of time at a fixed or variable interest rate. In return, the issuer of the bond agrees to pay back the original loan amount, known as the principal, along with periodic interest payments over the life of the bond. Bonds are typically used by governments and companies to raise funds for various projects or operations. They are considered fixed-income securities because they provide a predictable stream of income to investors through interest payments. Bonds can vary in terms of maturity, interest rate, credit quality, and other features.

Economic Depression: An economic depression is a period of carried long-term economic downturn that is the result of lowered economic activity in one major or more national economies. Economic depressions maybe also characterized by their length or duration, and maybe showing increases in unemployment, larger increases in unemployment or even abnormally large levels of unemployment.

Recession: In economics, recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale hazard or natural disaster (e.g. a pandemic). In the United States and European Union, a recession is defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In the United Kingdom, a recession is defined as negative economic growth for two consecutive quarters.