Unit 4 Personal Finance

investment options in order based on level of risk:

Bonds Mutual Funds Stocks Real Estate

Describe inflation.

General increase in prices over time

What is the most common way that people buy stocks or bonds?

Get it through a broker (even online)

Speculative

HIGH EARNINGS POTENTIAL , RISKY, TECHNOLOGY, NO DIVIDENDS

Do you want your investment to earn at a higher or lower rate than the inflation rate? Why?

Higher so can beat inflation and have purchase power in future

Define liquidity.

How easily assets can be turned into cash.

Describe the relationship of risk and return with investing.

If want big returns have to take risk

What are the different reasons you should invest?

Increase long term wealth Invest to try and beat inflation to increase purchase power with money

What does the Dow Jones Industrial Average measure?

-Lists the 30 leading (top performing) industrial blue chip stocks in stock exchange

Explain what a mutual fund is and how one is managed.

A fund manager manages a mutual fund (Multiple people put their money together so you can buy a lot of investments)

What is a bond?

A type of debt that a company issues to investors for a specified amount of time. (Buying a company's debt)

What is compound interest? Explain.

Compound: Earning interest on interest [P(1+R/N)NT]

What does it mean to "pay yourself first"?

Consider savings to be a fixed expense • Set aside a predetermined amount of money for saving before using any of that money for consumption (spending)

Why is issuing stock a popular method used to raise capital?

Do not have to pay back stock investors if they fail

What terms are used to describe when the stock market is doing well, and when the stock market is doing poorly?

Doing well- bull Doing bad- bear

Cyclical

FOLLOWS THE ECONOMIC CYCLE, INDUSTRY SPECIFIC

Blue chip

LONG HISTORY, STEADY GROWTH, INDUSTRY LEADERS

Income

LOW BETA, HIGH DIVIDENDS

Countercyclical

MOVES IN THE OPPOSITE DIRECTION OF THE ECONOMY, RECESSION-PROOF INDUSTRIES

What is the NASDAQ?

New companies, usually technology (an exchange it is bought and sold on but idk)

Does the past performance of a stock tell us exactly what to expect for that stock in the future? Why or why not?

No because stocks can increase or decrease based upon the status of the company expanding/growing/taking in more money. (cannot predict future)

Will a stockholder always make a profit when they sell their shares of stock? Why?

No, company's stock value changes

Growth

RAPID GROWTH, NO DIVIDENDS

What are the advantages of investing in mutual funds?

Simple way to make a diversified investment Managed by a financial professional Allow investors to participate in a wide variety of investments

What is diversification? What is the point of a diversified portfolio?

When an investment or portfolio is spread across several different investments This helps lower risk; If one investment fails you have a chance at succeeding with another