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.
Major Stocks
-New York Stock Exchange (NYSE) largest
-The American Stock Exchange (AMEX) small companies
-NASDAQ stands for the National Association of Securities Dealers Automated Quotation System which is done by computer so it has no physical location
The Dow Jones Industrial Average
A measure of the stock market
Securities
A financial asset (such as a stock or bond) that can be bought and sold; a tradable financial asset.
Bear vs. Bull Market
The terms bull market and bear market describe upward (bullish) and downward (bearish) market trends.
Employee benefits package
Employee benefits are various non-wage compensations provided to employees in addition to their normal wages or salaries. The purpose of employee benefits is to increase the financial security of staff members, and in doing so, improve worker retention across the organization
Common employee benefits
Are retirement plans, savings plans, insurance, leave (sick, vacation, etc.), stock purchase, educational reimbursement, incentive plans and cafeteria plans. In addition to considering salary when you are offered employment with a company, you should also evaluate the employer’s benefits package.
Simplified Employee Pension Plan (SEP)
A self- employed person may deduct up to 15% of their net profit on the business by investing in this.
401(k)
a retirement savings plan offered by a corporation to its employees. The employee contributes money to the this from his/her gross pay, and the money in the account grows tax deferred. In some cases, employers will match the employee’s contribution, but you should fund your plan whether your company matches or not.
403(b)
found in non-profit organizations such as hospitals, churches, and schools.
457
is deferred compensation, which means you are deferring or putting off compensation. Usually this is available for government employees
Guaranteed Investment Contract (GIC)
A bond fund that should not be used because this is like a CD inside of your 401(k). You will only make about 3–4%, and it will not help you win long term.
Pre-tax contributions
This is taken from your gross income before taxes. Taxes are due upon withdrawal.
After-tax contributions
are taken from your net income after taxes. No taxes are due upon withdrawal.
I believe…
I should:
-Invest to build wealth and meet financial goals.
» When investing, diversification lowers risk.
» Employee benefits often include insurance and retirement plans.
