Chapter 8 Flashcards
Diversification
The practice of dividing the money a person invests between several different types of investments in order to lower ris
Investing
The process of setting money aside to increase wealth over time for long-term financial goals such as retirement
Investment
Account or arrangement in which a person puts his/her money for long-term growth; invested money should not be used for a suggested minimum of five years
Liquidity
Quality of an asset that permits it to be converted quickly into cash without loss of value; availability of money
Potfolio
A list of your investments.
Risk
Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit
Risk-Return Ratio
Relationship of substantial reward compared to the amount of risk taken
Share
Piece of ownership in a company, mutual fund or other investment
Stocks
Securities that represent part ownership or equity in a corporation
Tax-Favored Dollars
Money that is invested, either tax deferred or tax free, within a retirement plan
Annuity
A contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments.
Bonds
A money instrument by which the company owes you money; a form of I.O.U. The company that issued the bond makes regular interest payments to the bond holder and promises to pay back or redeem the face value of the bond at a specified point in the future (maturity date).
Mutual fund
An investment vehicle made up of a pool of money collected(a.ka. fund) from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets
Basic Rules of Investing
-Keep it simple
-Never invest just for tax savings
-Don’t invest with borrowed money
Money Markets
Low-risk, low return great for short-term emergency funds because of there liquidity and stability.
Single Stocks
High-risk piece of ownership
Bond
Money instrument by which the company owes you money; a form of I.O.U. The company that issued it makes regular interest payments to the holder and promises to pay back or redeem the face value at a specified point in the future (maturity date)
Return
The fluctuation in price and the profit
Qualified Plan
A tax-favored investment (which means it has special tax treatment)
Includes:
-Roth IRA
-IRA
Roth IRA
Funded with after-tax money, which allows you to use the money tax free in retirement.
After five years, you can make tax-free, penalty-free withdrawals of earnings under these conditions:
1. Over 59 and a half years old
2. Because of death or disability
3. First-time home purchase
IRA (Individual Retirement Arrangement)
Everyone that earns income can have this tax advantages for retirement savings and can contribute annually.
Employees manage this and can grow tax-free earnings until withdrawl.
Real Esate
People with a lot of money should invest in this and is the least liquid investment a consumer can make. Based on appearance and market. Supply and demand
Horrible investments
-Gold
-Commodities (food or mining)
-Daytrading
-Viaticles
Viaticles
This is when someone with a terminal disease sells his life insurance policy for less than face value. The buyer then cashes in the full amount at the original owner’s death. There are a lot of scam artists surrounding this type of investment, and investors often incur legal risks.