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