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Personal Finances > Investing Fundamentals > Flashcards

Investing Fundamentals Flashcards

1
Q

What three things must investment goals be to be useful?

A

Written, specific, and measurable

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2
Q

What is one of the biggest mistakes you can make when planning for the future?

A

Not thinking about retirement

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3
Q
A
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4
Q

The time value of money is built on what two important concepts?

A

First, you save and invest for a long period. Next, your savings and investments grow because of interest, dividends, or increases in value.

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5
Q

What are some things you should do before making your first financial investment?

A

Paying your bills on time, creating a budget, managing credit card debt, starting an emergency fund, and establishing a line of credit.

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6
Q

What is a good rule of thumb when limiting consumer credit?

A

Limit consumer credit to no more than 20% of your net (after tax) income.

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7
Q

What are four popular apps to help with budgeting?

A
  • Quicken
  • Mint
  • YNAB
  • EveryDollar
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8
Q

What are two things you should consider when choosing a credit card?

A

Annual percentage rate and annual fee

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9
Q

What are four helpful tips to avoid excessive credit card debt?

A
  • Pay bills in full each month
  • Don’t use credit card to pay for many small purchases
  • Don’t use the cash advance provision
  • Stick to one or two cards
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10
Q

How much do financial planners recommend saving in an emergency fund? Where should this money be saved?

A

At least three months of living expenses

In a savings or money market account.

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11
Q

What is a line of credit? Where can you establish one?

A

A line of credit is a short-term loan that is approved before the money is actually needed.

You can establish one at a bank, savings and loan association, or credit union.

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12
Q

Economics

A

The study of how wealth is created and distributed.

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13
Q

What is a fiscal policy?

A

Policies used by the government to alter the tax structure and levels of government spending.

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14
Q

What is a monetary policy?

A

Policy used by the Federal Reserve to determine the level of interest rates that consumers and businesses pay to borrow money.

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15
Q

What is a business cycle?

A

The increase and decrease of a nation’s economic activity,

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16
Q

What are five things you can do if you fear the economy is heading for a downturn?

A
  1. Establish a larger than usual emergency fund
  2. Know what you owe
  3. Reduce spending
  4. Notify credit card companies if you cannot make payments
  5. Monitor value of investment and retirement accounts
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17
Q

What does safety mean in an investment?

A

It is an investment with minimal risk or loss

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18
Q

What does risk mean in an investment?

A

It is an investment with a measure of uncertainty about the outcome

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19
Q

What is a speculative investment?

A

A high-risk investment made in hopes of obtaining a large profit in a short time.

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20
Q

What are five factors that determine your tolerance for risk in investments?

A
  1. Your age
  2. Your income level
  3. Whether or not you have children
  4. Your level of financial background/training
  5. Whether or not you have a stable job
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21
Q

True or False. There is a risk that financial returns will not keep pace with the inflation rate.

A

True

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22
Q

What rule sums up the relationship between the factors of safety and risk?

A

The potential return on any investment should be directly related to the risk the investor assumes.

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23
Q

What are the five components of the risk factor in investments?

A

Inflation risk, interest rate risk, business failure risk, market risk, and global investment risk

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24
Q

What is inflation risk?

A

The risk that financial return on investment with not keep pace with inflation rates.

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25
Q

What is business failure risk?

A

The risk that things like bad management, unsuccessful products, competition, economy, etc. will cause a business to be less profitable.

26
Q

What is market risk?

A

The risk of external factors affecting the market value of stocks, bonds, mutual funds, real estate, and other investments.

27
Q

What are the two types of market risk? What does each of them mean?

A

Systematic risk - Things that affect the overall market and economy (ex. politics, pandemic, war, rising interest rates.

Unsystematic risk - Things that affect a specific company or industry. Can be reduced by diversifying your investment portfolio.

28
Q

What is global investment risk?

A

The risk of diversifying your investment portfolio by investing in foreign firms or international mutual funds. Can be risky if you are inexperienced.

29
Q

What types of investments should you go with if you want a predictable investment income?

A

Municipal bonds, corporate bonds, preferred stocks, common stock issues.

30
Q

What are growth stocks?

A

Stocks that have the potential to increase in value because of company growth. Companies that are growth stocks pay little to nothing in dividends, thus they have more money to invest in the growth of their company.

31
Q

What is liquidity in investment?

A

The ability to buy or sell an investment quickly without affecting the investment’s value.

32
Q

What is asset allocation?

A

The process of spreading your assets among several different types of investments to lessen the risk.

33
Q

What are the six typical asset classes?

A
  • Stocks issued by large corporations (large cap)
  • Stocks issued by medium-sized corporations (medium cap)
  • Stocks issued by small companies (small cap)
  • Foreign stocks
  • Bonds
  • Cash
34
Q

What are six factors that affect the percentage you invest in each asset class?

A
  • Age
  • Investment goals
  • Ability to tolerate risk
  • How much you can save and invest each year
  • Dollar value of current investments
  • Economic outlook for the economy
35
Q

How does time impact where you invest your money?

A

If you have lots of time before you need to withdraw money, it is best to invest in stock and mutual bonds (high risk)

If you have little time before you need to withdraw money, you should invest in short-term government bonds, corporate bonds, and certificates of deposit (low risk).

36
Q

How does age impact where you invest your money?

A

The younger you are, the more time you will have to recover if investments take a downturn. As you get closer to retirement, you will want to change your portfolio from high to low risk investments.

37
Q

How can you calculate the % that your portfolio should be made up of growth-oriented stocks?

A

Subtract your age from 100. The difference is the % of assets that should be in growth investments.

38
Q

What is equity capital?

A

Money that a business obtains from its owners.

39
Q

True or False. If you don’t want your stock anymore, you can get your money back from the company for the stock.

A

False. Companies are not required to repay the money obtained from the sale of the stock or to repurchase the stock at a later date. You must sell your stock to another investor.

40
Q

True or False. A corporation is under no legal obligation to pay dividends to stockholders.

A

True.

41
Q

What is a dividend?

A

A distribution of money, stock, or other property that a corporation pays to stockholders.

42
Q

What are the two types of stock?

A

Common stock and preferred stock

43
Q

What is common stock?

A

Most basic form of corporate ownership. Provides a source of income if company pays dividends and has potential for growth if dollar value of stock increases.

44
Q

What is preferred stock?

A

Corporate ownership that receives dividends before common stockholders. More likely to receive dividends when the corporation is experiencing financial hardship.

45
Q

What is a corporate bond?

A

A corporation’s written pledge to repay a specific amount of money along with interest.

46
Q

What is a government bond?

A

A government or municipality’s written pledge to repay a specific amount of money along with interest.

47
Q

What is a mutual fund?

A

Pools money from many investors to invest in a variety of securities.

48
Q

True or False. Mutual funds can be tailored by managers to meet the client’s needs and objectives.

A

True

49
Q

What is an expense ratio? What ratio do financial planners recommend you look for when choosing a mutual fund?

A

All the fees of a specific mutual fund. A ratio of 1 percent or less is recommended.

50
Q

How much do beginner investors believe real estate values increase every year? How much do they actually increase?

A

Beginner investors believe that real estate values increase by 10-15% a year. It actually increases 3-5% over a long period of time.

51
Q

What is the most important factor when evaluating a real estate investment?

A

Location

52
Q

What are seven other questions to consider before purchasing a property?

A
  1. Is the price competitive with similar properties?
  2. What type of financing available if any?
  3. How much are the taxes?
  4. Does the property need repairs?
  5. What is the condition of the buildings and houses in the intermediate area?
  6. Why are the present owners selling the property?
  7. Is there a chance the property will decrease in value?
53
Q

What are six common speculative investments?

A
  1. Options
  2. Commodities
  3. Derivatives
  4. Bitcoin/cryptocurrencies
  5. Precious metals/gemstones
  6. Antiques and collectibles
54
Q

True or False. You don’t have to monitor certain types of investments.

A

False. No matter what type of investment you choose, you should monitor it to determine if it increases or decreases in value.

55
Q

Why should you keep accurate records of your investments?

A
  • Helps you spot opportunities to maximize profits or reduce dollar losses when you sell investments
  • Helps you decide if you should invest additional funds in a particular investment
  • Can help you reevaluate an existing investment by using previous sources that helped you evaluate the investment in the past.
  • Helps in filling out taxes
56
Q

When selling new securities, corporations must relaease all info regarding the investment in a document known as ________

A

Prospectus

57
Q

How are short-term and long-term investment gains taxed?

A

Short term gains (held for a year or less) are taxed at ordinary tax rates while long term gains (held for more than one year) are taxed at reduced tax rates.

58
Q

What are five websites you can go to for investment information?

A
  • Bloomberg.com
  • CNN/Business
  • Financial Industry Regulatory Authority
  • Investor.gov
  • Securities and Exchange Commission
59
Q

What are three business and general periodicals to look at for investment information?

A
  • Barron’s
  • Bloomberg Businessweek
  • The Economist
60
Q

What are three periodicals to look at for improving your investment skills?

A
  • Money
  • Kiplinger’s Personal Finance
  • Worth
61
Q

Where can you obtain annual reports and additional info about a corporation?

A

A corporation’s website or an investor relations department of a corporation.

Personal Finances (6 decks)

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