Financial Fact: Terms to Know for Financial Fluency, Part 1

Diving into the world of finance can feel like learning a new language. With so many terms and distinctive jargon, it’s easy to get overwhelmed. In this first of a two-part series, we’ll explain some financial terms to help you navigate your financial journey. Let’s break it down together!

Understanding the difference between marketability and liquidity is important to exercising savvy money management. Marketability refers to how easily an asset can be bought or sold. Think of it as popularity. If an asset is marketable, like shares of a well-known company, such as Apple or Microsoft, there are plenty of buyers and sellers interested. This name recognition makes it easier to find a buyer when you want to sell.¹

Liquidity, on the other hand, is about how quickly you can convert an asset into cash without affecting its price. Cash is the ultimate liquid asset because you can use it immediately. Most publicly traded large stocks are also liquid because you can sell them quickly at the current market price. However, a house, while marketable, is not very liquid because it can take time to sell without lowering the price significantly.²

Why does this matter? Knowing the difference helps you manage your investments better. If you need cash fast, you might want liquid assets. But if you're investing for the long term, you might choose investments that are less liquid but potentially more profitable.³

Understanding the difference between ordinary income and capital gains is like knowing the difference between earning money from your job and making a profit from selling your old baseball card collection or your antiques. Here's the scoop.

Ordinary income is what you earn from your day-to-day activities. It includes your salary, wages, tips, and bonuses. It can also come from interest earned on a savings account or rental income from a property you own. The key point is that this income is taxed at your regular income tax rate, which can range from 10 to 37 percent depending on your tax bracket.⁴

Capital gains, on the other hand, are the profits you make from selling investments like stocks, bonds, or real estate. There are two types of capital gains: short-term and long-term. Short-term capital gains apply if the assets are held for one year or less and are taxed at your ordinary income tax rate. Long-term capital gains apply for holding periods of more than a year, and benefit from lower tax rates, typically ranging from 0 to 20 percent.⁵

Why is this important? Knowing the difference helps you plan your tax strategy. For example, holding onto an investment for over a year can significantly reduce your tax bill compared to selling it quickly.⁶

Understanding all these financial terms can help you make smarter financial decisions. Watch for more terms in part two of this series.

^1. https://www.lsd.law/define/marketability 

^2. NerdWallet. "Investment Liquidity."

^{3. Investopedia. "Understanding Liquidity and How to Measure It."}

^{4. Rocket. "Capital Gains vs. Ordinary Income Tax."}

^5. "Capital Gains Tax 101." NerdWallet.

^6. Forbes. "What Are Capital Gains?"