Money Matters Chapter 6

Risk tolerance

The amount of uncertainty a person is willing to handle

Coupon rate

The annual rate of interest the bond issuer promises to pay on the face value

Investing

purchasing a financial product or valuable item with the goal of increasing wealth over time in spite of possible loss

Rate of return

The amount earned on an investment for a given period of time

Yield

The amount of money earned on the investment , usually expressed as an annual percentage

Economic factors affecting values and performance of investments

Business cycle fluctuates, interest rates fluctuates, stock market fluctuations (Ex. bull + bear market)

Valuable goods

Collectables (coins, books art) Precious metals (gold, silver) Gemstones (diamonds)

Initial public offering (IPO)

Companies first sale of stock to the public; done to raise capital or to become publicly traded

Most common types of bonds

Corporate bonds; municipale bonds

Investment characterizations

Degree of volatility, rate of return, level of risk, liquidity

Series EE Bond

Earns fixed rate of interest for up to 30 years

Series 1 Bond

Earns interest based on combining a fixed interest rate and inflation rate

Factors affecting values and performance of investments

Economic indicators, product innovation, governmental actions, transactional costs

Primary market

Exists when a company first sells stock to public

Secondary market

Exists when investors purchase securities from other investors rather than from issuing company

Bear market

Extended period of fallings stock prices

Bull market

Extended period of rising stock prices

Brokerage Firm

Facilitates the purchase and sale of financial securities

Securities

Financial assets issued by corporations, governments, and other organizations

Business cycle

Fluctuates between periods of growth and slowdown

Investment club

Group of people who work together to learn about securities and invest their pooled funds

Common stock

Has voting rights; receives dividends when declared by the company

Personal investment plan

How to develop investment growth

Stock split

If the stock price is too high, it decreases the share price and makes it more affordable to investors

Capital gain

Income that results from selling an asset for more than the purchase price

Benefits of investing

Increase wealth, earn a steady income, beat inflation, take advantage for tax benefits, preserve wealth in unstable economic times

US Savings bonds

Series EE Bond; Series 1 Bond

Treasury bills (T-Bills)

Short-term debts with maturities ranging from a few days to 52 weeks

Treasury notes (T-Notes)

Short-term securities with maturities of 2, 3, 5, 7, or 10 years

Appreciation

An increase in value of an investment (growth)

Mutual fund

An investment created by pooling the money of money people and investing it in a collection of securities

Stock categories

Blue chip, income, growth, defensive, cyclical, penny

Online resources

1) commodity futures trading commission (CFTC) 2) securities and exchange commission (SEC)

Bond

A certification of debt issued by a corporation or government

Investment portfolio

A collection of the investments a person has made

Real-estate investment trust (REIT)

A company that owns income-earning real estate ex. apartments, shopping malls, office buildings, hotels

Capital loss

A loss of money that occurs when the selling price of an investment is less than the purchase price

Risk

A measure of the likelihood that something will be lost

Dividend

A portion of a companies earnings that is paid to stockholders

Securities exchange

A secondary market where securities are bought and sold through stockbrokers

Stock

A share in ownership of a corporation

Proxy

A stockholders written authorization to have someone else cast a vote on his or her behalf

Preferred Stock

A type of stock that pays a regular dividend at a fixed rate; must be paid before common stockholders receive dividend

Dividend reinvestment plan (DRIP)

Allows investors to reinvest cash dividends by purchasing additional shares of stock

Stock broker

An agent who usually charges a commission to execute stock trades for clients

Corporate bonds

Issued by corporations that need money to operate and expand

Municipal bonds

Issued by state, county, and city governments

Prospectus

Legal document that gives a detailed description of a security risk, performance, fees and expenses, and management

Treasury bonds (T-Bonds)

Long-term investments with maturities of 30 years

Disadvantages of mutual funds

Management fees, sales commission, lack of personal control, and minimum investment

Information stated on bonds

Maturity date; face value (principle), yield

Investment information

Online resources, annual reports, Prospectus

Advantages of mutual finds

Professional management, diversification, and liquidity

Volatility

Quick and unexpected changes in value or price

Both corporate and municipal bonds ...

Rated high for quality and risk

Alternative investments

Real estate, Valuable goods

Net asset value (NAV)

Total of the funds assets minus its liabilities divided by the number of shares the fund has outstanding

Money market mutual fund

Types of mutual fund that deals with only interest-paying short-term investments

Over-the-counter (OTC) markets

Virtual markets where stockbrokers conduct business through a network of computers and telephones

Diversification

The spread of risk by putting money into different types of investments

Buy and Hold

The strategy of buying securities and holding them for long-term gains

Dollar-cost average

The strategy of investing a fixed dollar amount at regular intervals (Ex. monthly) without regard to price of investment

Level of risk

The degree to which an investment may deviate from its rate of return

Inflation

The overall rise of prices that reduces the value of money and return on investments

Market value

The price at which it can be bought or sold at a given point of time

Stock trade

The purchase or sale of shares of stock