investing pfab test
How is a bond different from a stock?
Bond-loans money to a company with a promise of the return on your investment with a gain. These are not a guarantee though Stock- you are buying a small piece of ownership in the company and there is no guarantee that you will make money.
Why is diversification a recommended investment strategy?
Diversification is a great strategy because you are protecting against a major loss. BY investing in one type of investment you run the risk of losing (your investment value going down) Diversification protects against a major loss by giving exposure to multiple types of investments that help protect against that loss.
How can someone make money from investing in a stock?
Dividends: Shareholders of a stock can receive a portion of the profits Sell a stock that I own at a higher price than what I bought it for.
How does investing in the stock market differ from putting money in a savings account at a bank?
Investing is riskier but provides more return on your investment. Savings rarely beats the rate of inflation.
When investing in individual stocks, you should expect that...
Is it always going to make money? No there is a Is it easy to time when to purchase or sell a stock? No the market fluctuates Do I own a portion of the company? Yes each share makes up a small piece of ownership in the company.
Why are Index Funds such a popular investing option?
It allows people to buy into stocks they would not normally buy into. it also spreads the risk with so many companies in one pool. it is a simple diversified investment that over the last 50 years has made an average of 10% in returns each year.
Why are Target Date Funds (TDFs) becoming an increasingly popular option to invest in?
It requires little to no attention for you the investor. It allows a financial advisor to make the investment decisions for you to help you reach your retirement goal.
What kinds of cognitive biases and behaviors can prevent people from making smart investing decisions?
Negative feelings we have about a brand or stock although something may be a good ¨buy¨ you may not trust the company and choose not to buy the stock. Just because someone else owns the stock or it is a popular product. Does not mean it is a good ¨buy¨ for you
What is the relationship between risk and return when considering an investment?
Rank from least to most risky (1-4) Bonds- 1 Index Funds- 2 Mutual Funds- 3 Stocks- 4 The more risky an investment is the higher likelihood of earning a greater return/loss. That return is not a guarantee. The less risky an investment is, the likelihood of losing money is lower.
Why is it important for you to understand YOUR risk tolerance before you start investing?
Risk and time are two factors that affect your investments. You want to be riskier when you are younger. Each investment comes with different risks and understanding when to purchase those is important.
Determine which investment options from LEAST risky to MOST risky. (i.e. Index funds, Bonds issued by municipalities, Savings accounts that are FDIC insured, Stock issued by a company, US Treasury bonds)
Saving accounts that are FDIC insured- 1 US Treasury bonds- 2 Bonds issued by municipalities (Chesterfield)- 3 Index Funds- 4 (S&P 500 or the Naddaq) Stock issued by a company- 5
You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 per share. What was your profit or loss on StreamingVideoCo stock? (Assume that StreamingVideoCo didn't pay a dividend and that you didn't incur any trading fees during that period.)
Sold 80*10- 800 vs bought for 45*10- 450 800-450= $350 PROFIT
Elaine has been saving for a while and has $1,000 to invest. She would like this $1,000 to be the start of her retirement fund. What do you think is a good long-term investment strategy for Elaine?
To manage risk, you can use the 100 minus your age formula to determine your diversification 100-age tells you how much to invest in stocks Hire a financial advisor to help you make decisions You can invest in an index fund (ETF an exchange traded fund) which is a diversified investment Target Date fund
What is a vesting period?
Usually used with company stock options. Where you have to work for a set amount of time to be granted the value of the stock.
What is one question an investor should ask before investing in a Roth IRA or a Traditional IRA?
What are the income limits to invest in a Roth IRA? When do I have to pay taxes on my investments? A traditional IRA you pay taxes after pulling your money out. A roth you don't pay taxes.
As a shareholder in a public company, what are the benefits available to you?
You earn voting rights and ownership of the company
