Investing final

T/ F a majority of actively managed mutual funds "beat the market" and are worth the fees they charge

false

What is meant by "asset allocation"?

how much money do you put in different types of investments such as stocks and bonds

How does simple interest differ from compund?

it is calculated on principle alone; compound interest is calculated on the principal as well as the interest you have already earned

importance of diversifying investments

minimizes the risk (if one performs poorly, the others will make up for it)

What is one advantage of starting to invest as early as possible?

money has more time to grow- increasing the benefit of compounding returns.

If investing can bring higher returns, why should you put money in a savings account at all?

savings account are low, but also low risk- to save money up for a larger purchase or an emergency fund

Once you have asset allocations, whats next level of diversification you should do among each asset class?

you want to own different investments in each asset class ex: purchase stock in a company or in both US-based and international companies

Why does the value of your bond decrease when increae rates increase?

when they increase, companies issue bonds with hgher interest rates, so your existing bond (which has lower rates) will be worth less

Minimize risk from investing in bonds?

you can check the rating on the bond before you purchase it- own government bonds (considered almost risk-free)

Risks when investing in bonds- how to minimize

the issuer of the bond (the company) might default, not being able to pay you back. You can minimize this risk by making sure the company's bond you own is not a high-risk company with a high probability of paying you back. While not perfect, there are bond ratings that can help an investor determine the riskiness of a bond

As an investor, what is the risk involved when investing in companies on the stock exchange?

the price of stocks can decrease, for example, when the company receives bad press

risks when investing in stock market

the price of the stock could fall, causing you to lose money

how does selling shares on the stock excnage benefit companies?

they recieve funds to further expnd their company

t/f index funds are mutual funds and have lower fees than actively managed mutual funds

true

Why is it a good idea to invest in both bonds and stocks?

- help stabilize the rise of stocks for aggressive investors - steady progress if stock performs poorly - stocks help protect bonds from inflation - usually, the stock market produces better results than inflation

What 3 tips would you give someone who is about to invest their money for the first time?

- Diversify your investments - Focu o fees if you are investing in a mutual fund - keep it simple - start early

Your friend says, " I have some extra money, but I'm not sure if I should save or invest it." What key questions would you ask your friend to help them figure out what to do?

- how do you envision using the money? - do youbneec to access the money in the near future? - how comforyable are tou with risk and portential that you cpuldnlose some of your money? - what do you know about investing in the stock market?

Idefinty a way in which saving is different than investing

- saving is better for short term, emergency funds - saving usually earns a lower interest rate - saving is generally lower-risk than investing

benefit of investing in an Exchange Traded Fund (ETF)

You have more control and flexibility because you can trade ETF's anytime while the market is open

What is the advantage of investing early for retirement?

Your investment has more time to grow, and because of the power of computing returns, the earlier you start, the more opportunity your money has to grow

Mutual fund

a fund that invests in a collection of stocks an/or bonds to provide geater diverisfication

Bonds

a loan given to a company or government by investors, and they are then given the money back with interest

What is a bond and how do you make money from it?

a loan is given to a company/ government by investors- given back with interest

ETF

a type of investment that aldo tracks a finaical market index

Index fund

a type of mutual fund that matches a finical markey index

If the share price grows as the company grows. how does buying shaes in a company benfit an investor?

an investor will be able to sell these shares for a higher price to make a profit

Why do you earn more money using compound interest than you would using simple interest?

because compound interest is on the base amount you invested plus the money you made in interest in previous years. Simple interest is receiving the same percentage only on the base amount you have in your account every year.

Does compound interest have more impact on long-term investments or long-term?

compound interest because time is necessary for the money made from interest to increase

How does diversification protect investors?

diversification helps lower your risk by reducing the volatility or how much your investments will go up or down over time- doesn't guarantee you will make money

explain what it means to own an indiviual stock

each stock represents a small part of the company so by owning a stock you own a small portion of the company

Benefits of investing in collective stocks/ bonds

easier to diversify investments

2 ways you can make money by investing in stocks

selling your stocks and getting paid in dividens