Chapter 10: Fundamentals of Investing Flashcards
Why should you establish an investment program?
To grow your money over time, reach financial goals, and prepare for future needs. Goals should be specific, measurable, and aligned with your circumstances.
What is the time value of money in investing?
Small, regular investments grow over time due to compounding interest. The longer you invest, the more you earn.
What are the key factors affecting investment choices?
1) Safety
2) Risk
3) Income
4) Growth
5) Liquidity
What is risk tolerance?
The psychological ability to endure potential losses or fluctuations in investment value.
What are examples of low-risk and high-risk investments?
Low-risk: GICs, savings bonds, T-bills
High-risk: Stocks, options, commodities, collectibles
What are the 5 components of investment risk?
1) Business Failure Risk
2) Inflation Risk
3) Interest Rate Risk
4) Market Risk
5) Global Investment Risk
What types of investments generate income?
- GICs, T-bills, savings bonds (predictable)
- Mutual funds, ETFs, real estate (less predictable)
What is investment growth?
Increase in value over time. Examples: stocks, growth funds, real estate
What is investment liquidity?
The ability to buy/sell investments quickly without affecting value.
What are stocks (equity investments)?
Shares of ownership in a company. Stockholders may receive dividends and share in company growth.
What are bonds?
Loans to corporations or governments. Bondholders get regular interest and principal repayment at maturity.
What are mutual funds?
Pooled money managed by professionals. Offers diversification and a range of risk levels.
What are segregated funds?
Similar to mutual funds but offer insurance protection. Sold by life insurance companies.
How do you invest in real estate?
- Buy property directly
- Invest via REITs (Real Estate Investment Trusts) for liquidity and steady income
What is securitized debt?
Debt (like credit card or loan payments) bundled and sold as bonds.
What are examples of speculative investments?
- Options
- Commodities
- Precious metals
- Antiques, stamps, collectibles
What is diversification?
Spreading investments across different asset types to reduce risk.
What is the role of a financial planner?
Help set goals, choose investments, and plan finances. Be cautious of how they’re paid — it may affect advice.
