27 Investment Choices Flashcards
What is an asset allocation fund?
A mutual fund that provides investors with a portfolio of a fixed or variable mix of stocks, bonds, and cash equivalents to achieve diversification while accommodating risk tolerance.
Asset allocation funds aim to balance risk and return by diversifying across different asset classes.
What defines a balanced fund?
A mutual fund that provides investors with a mix of stocks, bonds, and cash equivalents to balance long-term growth, income, and preservation of the money invested.
Balanced funds typically maintain a set ratio of equities to fixed-income securities.
What are blue-chip stocks?
Stocks issued by large, well-known companies that typically have sound financial histories and solid dividend and growth records.
Blue-chip stocks are considered safe investments due to their stability.
Define a bond in investment terms.
An investment vehicle where the investor makes a loan to the company in exchange for a specific rate of interest during the life of the bond.
The principal is repaid when the bond matures.
What is a bond fund?
A mutual fund where money is invested in bonds.
Bond funds can provide regular income and are generally less volatile than stock funds.
What does a call option allow an investor to do?
The right to buy a security at a set price within a specific time.
Call options are often used to speculate on stock price increases.
What are capital gains?
Profit received when shares of stock are sold at a price higher than the purchase price.
Capital gains are taxed differently than ordinary income.
What characterizes common stock?
Dividends are paid based on the company’s performance and the owner has voting rights.
Common stockholders may receive dividends, but these are not guaranteed.
What is the coupon rate?
The interest rate paid on a bond.
The coupon rate is a key factor in determining a bond’s yield.
Define cyclical stock.
Stocks issued by companies whose earnings tend to follow the overall economy.
Cyclical stocks perform well in economic expansions and poorly in recessions.
What is default risk?
The risk that the company or agency that issued a bond may not be able to pay the interest or repay the principal at the maturity date.
Higher default risk typically leads to higher yields on bonds.
What is a defensive stock?
Stocks issued by companies whose earnings tend to move inversely to the economy and may increase during economic downturns.
Defensive stocks are considered safer during economic declines.
What is a derivative?
A security that derives its value from another asset.
Derivatives can be used for hedging or speculation.
What does diversification mean in investing?
Investing in several different types of securities to reduce overall risk in an investment portfolio.
Diversification aims to minimize the impact of any single asset’s poor performance.
What are dividends?
Investment income received from stocks.
Dividends can be reinvested or taken as cash.
Define an equity fund.
A mutual fund where money is invested in stocks.
Equity funds aim for capital appreciation and may vary in risk based on the stocks selected.
What is face value in bond terms?
The principal amount of a bond.
Face value is the amount paid back to the bondholder at maturity.
What is a futures contract?
Gives a person the right to buy or sell a commodity or security at a set price within a specific time.
Futures contracts are often used in commodity trading.
What characterizes a growth fund?
A mutual fund where money is invested in stocks for strong companies that may not pay large dividends, aiming to provide a steady stream of income.
Growth funds typically focus on capital appreciation rather than income.
What is a growth stock?
Stocks issued by companies whose sales and earnings growth usually exceed the market.
Growth stocks often reinvest earnings rather than pay dividends.
Define an income stock.
Stocks issued by mature companies that typically pay high dividends but have low growth rates.
Income stocks are attractive to investors seeking regular income.
What is an index fund?
A mutual fund where money is invested in companies that are represented in an index such as the S&P 500.
Index funds typically have lower fees due to passive management.
What is an international fund?
A mutual fund where money is invested in companies that have a certain percentage of their assets in companies outside the U.S.
International funds provide exposure to global markets.
What does leverage mean in investing?
Borrowing money to make an investment.
Leverage can amplify both gains and losses.
Define a life-cycle fund.
A mutual fund where investments are tailored to meet the needs of a person at a certain stage of the life cycle, such as age or risk tolerance.
Life-cycle funds automatically adjust asset allocation over time.
What is a maturity date?
The date a bond investor receives the return of the principal.
The maturity date is critical for assessing the bond’s duration and cash flow.
What is a money market mutual fund?
An investment vehicle where money is invested in short-term securities with maturities of less than 30 days.
Money market funds aim to provide liquidity and preserve capital.
What is a mutual fund?
An investment vehicle that pools money from multiple investors to buy stocks, bonds, and other investments.
Mutual funds offer diversification and professional management.
What is an option in finance?
Gives a person the right to buy or sell various types of securities at a set price within a certain time.
Options can be used for hedging or speculative purposes.
What defines preferred stock?
Fixed dividends are paid, and the owner does not have voting rights.
Preferred stockholders have a higher claim on assets than common stockholders.
What is a put option?
The right to sell a security at a set price within a specific time.
Put options are often used to hedge against declines in stock prices.
Define a real estate investment trust (REIT).
A mutual fund that invests in real estate or makes mortgage and/or construction loans.
REITs provide a way for investors to earn a share of income produced through commercial real estate.
What is a sector fund?
A mutual fund where money is invested in securities from a specific industry.
Sector funds can be more volatile than diversified funds due to their concentrated exposure.
Define speculative risk.
The possibility of a gain or a loss.
Speculative risks are associated with investments that can yield high returns but also significant losses.
What is a speculative stock?
Stocks issued by higher-risk companies that have the potential for large capital gains but also large capital losses.
Speculative stocks are often volatile and may not provide dividends.
What is a warrant in finance?
A longer-term option to purchase a set number of a specific company’s shares of stock within a certain time.
Warrants can be more valuable than options due to their longer duration.
