Investing Unit Test Flashcards
What is the difference between a savings account and stock?
A savings account is a low-risk place to store money that earns interest, typically used for short-term savings. Stocks represent ownership in a company and can offer higher returns, but also come with higher risk and volatility.
What is compound interest?
Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. For example, if you invest $100 at a 5% annual rate, after one year you earn $5 in interest. In the second year, you earn interest on $105, resulting in $5.25, compounding your earnings.
Why is it important to make smart investing decisions?
Smart investing decisions help build wealth, secure your financial future, and manage risks. Poor choices can lead to losses and missed opportunities, while wise investments can benefit you over the long term through growth and income.
What is an ETF? (Exchange-Traded Funds)
An ETF is a type of investment fund that holds a collection of assets (like stocks or bonds) and trades on an exchange like a stock. This allows for easier diversification and lower fees compared to mutual funds.
What is the difference between risk and return?
Risk refers to the potential for loss or the uncertainty of an investment’s future performance, while return is the profit or income generated from an investment. Generally, higher risk can lead to higher returns, but it also means the potential for greater losses.
Why is diversification necessary as an investment strategy?
Diversification reduces risk by spreading investments across various assets or sectors. This way, if one investment performs poorly, others may perform well, helping to stabilize overall returns.
What is the difference between a bond and a stock?
A bond is a loan made to a company or government that pays interest over time and returns the principal at maturity. A stock represents ownership in a company and may provide dividends but carries more risk since its value can fluctuate significantly.
How would you describe Social Security? What’s the correct age to collect?
A government program providing financial support during retirement. Full retirement age is typically between 66 and 67.
Why are index funds so popular?
They offer low fees, broad market exposure, and typically outperform actively managed funds due to lower costs.
What is a mutual fund?
A pooled investment that buys a diversified portfolio of stocks, bonds, or securities, managed by professionals.
What is the difference between an individual bond and a bond fund?
An individual bond is a specific loan to a company or government, paying fixed interest until maturity. For example, a 10-year $1,000 bond might pay 3% interest each year. A bond fund, on the other hand, is a collection of many bonds. It offers diversification and professional management, but you don’t own the bonds directly. For instance, a bond fund might hold hundreds of different bonds, spreading risk across them.
What factors can influence an individual company’s stock prices?
Earnings reports, economic news, industry trends, management decisions, market sentiment, and geopolitical events.
What is a shareholder?
An individual or entity that owns shares in a company, giving them a claim on the company’s assets and earnings.
What is the difference between a Roth IRA and a Traditional IRA?
A Roth IRA allows after-tax contributions with tax-free withdrawals; a Traditional IRA involves tax-deductible contributions with taxable withdrawals.
