Finance Definition


Dividend – A payout to the shareholders of a particular stock. When a company is performing well and earns a profit, they can opt to payout some or all of that profit to their shareholders in the form of a dividend.

Credit Rating

Credit Rating – This is the evaluation of credit worthiness of a country, a company, or an individual. It basically is a standardized way of determining how likely a debtor is to paying back their debts. In the case of countries and companies, a common rating scale is AAA, AA, A, BBB, BB, B, CCC, CC, C, Default, No Rating – in that order of likeliness to repay. However, there are other rating scales that vary slightly from this scale. There is also a FICO credit rating that judges the creditworthiness of individuals. This scale ranges from 850-300. The higher the number the more likely you are deemed to repay your debts. The worse a country’s, company’s, or individual’s credit rating is the more expensive it is to take on debt. In other words, the worse the credit rating, the higher the interest you would pay on your debt.

Common Shares

Common Shares (Stock) – A form of equity, where the holder of stock owns a portion of the issuing company. The owner of common stock has voting rights, meaning they have a say in how the company acts, but they are last in line to receive dividends or a payout if the company were to go bankrupt. While common stockholders have voting rights, the majority of most companies’ stock (i.e., the votes) is either owned by the company itself, or is too spread out among investors to make much of an impact. However, in some instances an individual or another company may purchase enough of another company’s common shares to have significant voting rights over the company’s management. If this new owner happens to vote in a way that opposes the desires of the company’s management, this is known as a form of hostile takeover.

Preferred Shares

Preferred Shares (Stock) – Basically a hybrid between equity and debt. Preferred stockholders do not have the voting rights of common stockholders, but they do hold payout preference in dividend and liquidation events (i.e., they get paid before the common shareholders if there is not enough money to give out.)  Preferred shares are not typically extended to average investors, but instead are issued to massively wealthy individuals, other companies, or financial institutions. When you are purchasing stocks online, or through your broker, you are more than likely purchasing “common shares.”


Equity – the ownership of a company. For example if you own stock in a company you own equity in that company. Likewise, if a company chooses to finance themselves through selling stock, they are in effect giving away a portion of ownership in their company.

Hurdle Rate

Hurdle Rate – Is an internal rate that a company has determined must be beaten in order to take on a given project or investment. This rate is usually based on the opportunity costs of other projects or investments in which the company could invest. For example, if a company is evaluating a project that would return 8% on their money invested, they would only do the project if their hurdle rate was less than 8%. If the hurdle rate was higher than 8%, the company has effectively said that their money is more valued in other projects or investments where they think they could make at least 8%.


Debt – Is type of funding in contrast to equity and operational cash flows. Debt is accepting money from another party in the promise of returning that money including interest (in almost all cases) in a select amount of time. This is in contrast with equity, where the funding is provided in exchange for partial ownership of the funded group’s organization. Operational cash flows, is another funding method that effectively means funding your company through its own income.

Interest Rate

Interest Rate – One way to think of interest rate is the cost of the money you borrow. It is the rate at which you will pay interest on a given debt. For instance, if you borrow $100 from a friend, and promise to return $110 to them the next day, you are paying a 10% fee (or interest) for being able to borrow that money. Your interest rate is oftentimes determined on your credit rating. Typically the better your credit rating, the less you pay in interest for borrowing money. This is because you are viewed as more trustworthy, or less risky, by the person lending you the money.


Hedging – Making investments to protect against uncertainty and risk in market fluctuations. This is usually accomplished by purchasing futures.

Financial Instrument

Financial Instrument – A trade-able asset such as cash, stock, bond, derivative, annuity, etc.