Personal Finance Investing Test
Bond
a certificate acknowledging a loan from the lender to the government or a corporation for a specific time at a specific rate
Portfolio
a collection of asset's owned by an individual or by an institution. made of mainly stocks, bonds, mutual funds, money market funds and exchange traded funds
subsidiary company
a company that is owned and controlled by a different company
Stock split
a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares
Mutual Fund
a fund operated by an investment company which requires money from shareholders and invests in a group of assets in accordance with a stated set of objectives
DRIP (Dividend reinvestment pan)
a plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment
Limit order
a request to buy/sell stock at a specified price (can be good for a day, week, month, or until cancelled)
income stock
a stock with a history of paying high dividends and limited future growth options (ex: Johnson&Johnson, Proctor and Gamble, Pepsi co, conoco phillips)
securities
all types of investments, stocks, bonds, mutual funds, ETF's, options, and commodities
Defensive stocks
also known as cyclical stocks, necessity items, stock remains stable during economic decline (ex: food, shampoos, gas, Colgate Palmolive, Philip Morris, Sin industry, Ameren)
Expense Ratio
an annual charge that is a fixed percent of the funds asset value. Average is from .2-2% all mutual funds charge an expense ratio
Why investors buy common stock
appreciation of stock value (capital gain/loss) and income from dividends
where to purchase mutual funds
brokerage firm and or contact an investment company
Front Load (A shares)
charge the 4-6% commission when the shares are purchased
Back end load (B shares)
charge the 4-6% commission when the shares are sold
private corporation
closely held corporation, issue stocks to a small group of people, and not traded on stock exchanges
how personal financial planners can be compensated
commission based, hourly fee and or a percent of asset under management
Retained earnings
company keeps the profits in the business in order to help the company grow
Parent company
company that owns enough voting stocks in another firm/company to control management and operation by doing and influencing or electing its board of directors
S&P 500 stock index
consist of 500 large cap stocks of U.S. companies
Prospectus
corporate document that discloses financial information
statistical averages
don't pinpoint specific investments, but shows general direction of stocks and other investments ( Ex: Dow Jones industrial Average, S&P 500 stock index, and NASDAQ stock index)
income dividends
earnings a fund pays to the shareholder (may set it up to reinvest dividends)
401k/403b
employee sponsored retirement plan, pre tax money up to $7500 and is tax deferred until retirement
How/Where to buy mutual fund shares
go to a broker, the website of a mutual fund company (Charle Schwab, Scottrade, E-trade), or an online broker. Minimum investments can be as law as $500. Always find out about commissions and expenses which can vary widley
Federal Deposit Insurance Corporation (FDIC)
government agency that insures deposits in banks and thrifts in the event of bank failures
No load Fund
has no commission and no help
why companies issue common bonds
helps corporation raise money also a way of financing which can attract more conservative investors
individual investment representative
hourly rate or percent of assets, regulated by a states security agency and/or SEC held to fiduciary standard
capital loss
if market price goes down and you selling m
capital gain
if market price goes up and you sell
earn money with mutual fund
income dividends, capital gain distribution, and capital gain
IRA's
individual retirement accounts, up to $5500 if less than 50 year old and up to $6500 of 50 years or older)
IPO
initial public offering, the first time a company goes from a private company to a public one
asset allocation
investment strategy that aims to balance risk and reward by apportioning a portfolios assets according to an individuals goals, risk tolerance and investment horizon
Bull market
investors are optimistic about the economy and buy stocks
Bear market
investors are pessimistic about the economy and sell stocks
Issued by U.S. Treasury and other federal agencies
issued by companies
large cap stocks
less risky more stable stock, greater than 10 billion (ebay and General Electric)
Micro cap stocks
less than 250 million (exponent)
Full service broker
licensed financial dealer that provides a large variety of services to its clients, including research, advice, retirement planning, tax tips etc. (Ex. Edward Jones, A.G. Edwards)
Cyclical Stock
luxury item, usually if the economy is doing well then the market price goes up and if the economy is in decline the market price goes down (ex: fine dining, new cars, electronics travel, Ford, and Best buy)
Dow Jones Industrial Average DJIA
made up of 30 large cap stocks
speculative investments
makes an investment high risk, investments in commodities, options, collectibles etc. (cars, homes, luxury items etc.)
investment income
makes an investment low risk because you know the interest rate and when you'll receive the interest. dependable and safe (savings account, CD's, U.S. savings bond)
Loaded Fund
means commission and investment advice are recommending you lean towards products which earn them commission and may not be best for your portfolio, average between 4-6%
equity capital
money that a business gets from its owners to operate
Target retirement fund (asset allocation fund)
mutual funds that hold a group of other mutual funds run by the same company
NASDAQ Stock Index
national association of securities dealers automated quotations, has approximately 4000 companies
sources for evaluating stocks
online, newspapers, magazines, news programs, and or prospecurs
Stock
ownership in a company (voting rights)
Capital gain distribution
payments made to shareholders that result from the sale of securities inside the mutual fund (may set it up to reinvest capital gains)
capital gain distribution
payments made to shareholders that result from the sale of securities inside the mutual fund (may set up to reinvest capital gains)
Roth IRA
post tax money, grows tax free it can be withdrawn tax free after age 59.5 (up to $5500 total) original contributions may be with drawn at any time without taxes or penalities
Traditional IRA
pre tax money- tax deferred (money will be taxed when withdrawn at retirement) taxed as income after age 59.5
Rule of 72
quick way to tell how quickly your money will double
investment liquidity
refers to how long and at what cost does it take to convert an investment into cash
how to purchase mutual funds
regular account transactions (dollar cost averaging), payroll deduction plans, and or reinvestment plans
Broker
regulated by FINRA and must only uphold suitability standard
Market order
request to buy/sell stock at market value
Suitability standard
requires investment advisers to make suitable recommendations but duty is to the company and not necessarily the client
fiduciary duty
requires investment advisers to put their clients interest over their own
Blue chip stocks
safe investment, attracts conservative investors generally pay dividends older established corporations (walmart, coco-cola, exxon-mobil)
short term investment options
savings account short term CD's U.S. savings bond
low risk investments
savings account, MMDA, CD's
Securities exchange
secondary market place where brokers who represent investors buy and sell securities (NYSE, AMEX, NASDAQ)
public corporation
sells shares in a open market, anyone can purchase shares and own a part of the corporation
Dividend
share in the profits of a corporation
high risk investments
sophisticated, luxury investments, and startup companies
Online discount broker
stockbroker who carries out to buy and sell orders at a reduced commission rate but doesn't provide investment advice (Ex. Charles Schwab, Scottrade, E-Trade, and Ameritrade)
Long term investment options
stocks bonds mutual funds ETF
asset groups of mutual funds
stocks (equities), stocks (fixed income) and or bonds (cash equivalents or money market instruments
Medium Risk investments
stocks of large established, financially healthy companies; mutual funds that balance stock and bond holdings
Maturity Date
the day at which the bond is complete and the final payment is made to the investor
diversification
the idea to create a portfolio that includes multiple investments in order to reduce risk
Index funds
the investment objective seeks to make an index such as S&P 500, attemping to match the market not beat the market, passive fund
Par value (face value or principal)
the price an investor pays for bond
SEC
the securities and exchange commission, a government agency that oversees securities, transactions, activities of financial professionals and mutual fund trading to prevent fraud and international deception
Capitalization
the total value of the outstanding shares, equal to the current market price times the number of outstanding shares
Risk
the uncertainty of achieving a desired result, there are no guarantees that your investments will make money, all investments involve this. the more you have the more potential loss or reward you have.
Net asset value
the value of the mutual fund that is reached by deducting the fund's liabilities from the market value of all of its shares and then dividing by the number of issued shares
Common Stock
to raise money for a business and to help pay for ongoing activities, price is based on the market and they may offer dividends
Primary Market
when a company issues an IPO the stock is purchased through an investment bank or brokerage firm, then it gets sold to the public on the secondary market
capital gains
when the shareholder sells shares in a mutual fund for a profit
capital gain
when the shareholders sell shares in a mutual fund at a profit
Dollar cost averaging
when you invest the same amount of money every month and purchase a different amount of shares (depends on the price per a share)
reward
when you money does at least what you expect it to do, a higher risk means a higher of this
why buy a mutual fund
1. built in diversification 2. professional management 3. easy to buy and sell 4. wide range of funds to choose from
Mid-cap stocks
2-10 billion (dollar tree and ruby Tuesday)
Secondary market
where securities are traded among investors
Current (dividend) yeild
Annual dividend - Current market value (increase is good)
examples of brokerage firms
Charles Schwab, Scottrade, and or E-Trade
ETF (Exchange Traded Fund)
Funds traded on a stock exchange and track indexes like the NASDAQ, S&P 500, Dow Jones etc. When you buy these shares you are buying shares of a portfolio that tracks the yield and return of its native index. They don't try to out preform their corresponding ondes, but try to replicate its performance, they don't try to beat the market they try to be the market. Passivly managed, low expense ration. they are a diversified portfolio with the simplicity of trding a single stock. Investors can purchase these of the margin, short sell sales or hold for the long term. (recommend hold for the long term)
Government Bond
Issued by U.S. Treasury and other federal agencies
Investing
Objective: long term growth Products: stocks, bonds, mutual funds, EFT's Risk: business failure, inflation, financial market crash Return: interest, dividends, capital gains/losses Benefit: returns have outpaced inflation Drawback: risk of losing money is securities decline in value
Savings
Objective: short term needs or emergencies Products: saving account, CD's money Market: account Risk: none if insured by the FDIC Return: interest earned Benefit: money is liquid Drawback: returns have not outpaced inflation
ROI (return of investment)
Selling price - purchase price / Original price ( will tell you the percent of increase or decrease for your investment)