Investment Terms

Question 1

Stock Market

Answer 1

The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place.

Question 2

Bonds

Answer 2

A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments

Question 3

Bonds are used by

Answer 3

Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.

Question 4

How are bonds and interest rates connected?

Answer 4

Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.

Question 5

Do bonds have maturity dates?

Answer 5

Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

Question 6

Owners of bonds are d____ or c_____ of the issuer

Answer 6

debtholders, or creditors, of the issuer.

Question 7

Stock Exchange

Answer 7

A stock exchange is a centralized location that brings corporations and governments so that investors can buy and sell equities.

Question 8

Where do electronic exchanges take place

Answer 8

Electronic exchanges take place on electronic platforms, so they don’t require a centralized physical location for trades.

Question 9

What are electronic communication networks?

Answer 9

Electronic communication networks connect buyers and sellers directly by bypassing market makers.

Question 10

Auction Based Exchanges allow…

Answer 10

Auction-based exchanges such as the New York Stock Exchange allow traders and brokers to physically and verbally communicate buy and sell orders.

Question 11

A stock exchange does not own

Answer 11

A stock exchange does not own shares. Instead, it acts as a market where stock buyers connect with stock sellers.

Question 12

The leading stock exchanges in the U.S.

Answer 12

The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S.

Question 13

How does the Stock Market work?

Answer 13

In a nutshell, stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence with zero- to low-operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and as secondary markets.

Question 14

Does the economy influence the market?

Answer 14

The economy influences the stock market.

Question 15

What is a bear market?

Answer 15

A bear market is when a market experiences prolonged price declines.

Question 16

When does a bear market occur?

Answer 16

Bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and declining economic prospects.

Question 17

What is short selling in a bear market?

Answer 17

Investors can make gains in a bear market by short selling. This technique involves selling borrowed shares and buying them back at lower prices. It is an extremely risky trade and can cause heavy losses if it does not work out. A short seller must borrow the shares from a broker before a short sell order is placed. The short seller’s profit and loss amount is the difference between the price where the shares were sold and the price where they were bought back, referred to as “covered.”

Question 18

What is a bull market?

Answer 18

A bull market is a period of time in financial markets when the price of an asset or security rises continuously. A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies and commodities.

Question 19

Commonly accepted definition of a bull market?

Answer 19

The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.

Question 20

How do traders try to profit off a bull market?

Answer 20

Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit off bull markets.

Question 21

Inflation

Answer 21

Inflation is the rate at which the the value of a currency is falling and consequently the general level of prices for goods and services is rising.

Question 22

Inflation is sometimes classified into three types:

Answer 22

Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.

Question 23

Most commonly used inflation indexes are

Answer 23

Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

Question 24

Inflation can be viewed…

Answer 24

Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.

Question 25

These type of people may seem to like some inflation

Answer 25

Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.

Question 26

These type of people may not like inflation

Answer 26

People holding cash may not like inflation, as it erodes the value of their cash holdings.

Question 27

Inflation is required to promote…

Answer 27

Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.

Question 28

Causes of inflation

Answer 28

An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy.

Question 29

Demand Pull Effect

Answer 29

Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy’s production capacity. This increases demand and leads to price rises.

Question 30

Cost Push Effect

Answer 30

Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into commodity or other asset markets and especially when this is accompanied by a negative economic shock to the supply of key commodity, costs for all kind of intermediate goods rise. These developments lead to higher cost for the finished product or service and work their way into rising consumer prices.

Question 31

Built-In Inflation

Answer 31

Built-in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, workers and others come to expect that they will continue to rise in the future at a similar rate and demand more costs/wages to maintain their standard of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

Question 32

Consumer Price Index

Answer 32

The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens

Question 33

The Whole Price Index

Answer 33

The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level. While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing. Although many countries and organizations use WPI, many other countries, including the U.S., use a similar variant called the producer price index (PPI).

Question 34

The Producer Price Index

Answer 34

The producer price index is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time. The PPI measures price changes from the perspective of the seller and differs from the CPI which measures price changes from the perspective of the buyer.

Question 35

The formula for measuring Inflation

Answer 35

The above-mentioned variants of price indexes can be used to calculate the value of inflation between two particular months (or years). While a lot of ready-made inflation calculators are already available on various financial portal and websites, it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations. Mathematically,

Percent Inflation Rate = (Final CPI Index Value/Initial CPI Value)*100

Question 36

Compounding

Answer 36

Compounding is the process whereby interest is credited to an existing principal amount as well as to interest already paid. Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period.

Question 37

Dividends

Answer 37

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors. The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: cash and stock.

Question 38

How can dividends be paid out?

Answer 38

Dividends can be paid out in cash, by check or electronic transfer, or in stock, with the company distributing more shares to the investor.

Question 39

What is a cash dividend?

Answer 39

Cash dividends provide investors income, but come with tax consequences; they also cause the company’s share price to drop.
A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations. However, this does cause the company’s share price to drop by roughly the same amount as the dividend.

Question 40

Stock dividends

Answer 40

Stock dividends are not usually taxed, increase the shareholder’s stake in the company and give them the choice to keep or sell the shares; stock payouts are also optimal for companies that lack sufficient liquid cash.

Question 41

IRA’s are

Answer 41

Individual retirement accounts (IRAs) are tax-advantaged vehicles designed for long-term savings and investment—to build a nest egg for one’s post-career life.

Question 42

Traditional IRA contributions are

Answer 42

Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution. As a result, withdrawals—officially known as distributions—are taxed at your income tax rate when you make them, presumably in retirement.

Question 43

Roth IRA contributions

Answer 43

With Roth IRAs, you don’t get a tax deduction when you make a contribution, so they don’t lower your adjusted gross income that year. But, as a result, your withdrawals in retirement are generally tax-free. You paid the tax bill upfront, so to speak, so you don’t owe anything on the back end.

Question 44

What is the rule of 72?

Answer 44

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. The Rule of 72 is a simplified way to estimate the doubling of an investment’s value, based on a logarithmic formula.
The Rule of 72 can be applied to investments, inflation or anything that grows, such as GDP or population.

Question 45

Formula for rule of 72

Answer 45

Years to Double= 
Interest Rate
72
​	 
where:
Interest Rate=Rate of return on an investment
​

Question 46

How to calculate the rule of 72

Answer 46

If an investment scheme promises an 8% annual compounded rate of return, it will take approximately (72 / 8) = 9 years to double the invested money. Note that a compound annual return of 8% is plugged into this equation as 8, and not 0.08, giving a result of nine years (and not 900).
The precise formula for calculating the exact doubling time for an investment earning a compounded interest rate of r% per period is as follows:

\begin{aligned} &T = \frac{ \ln( 2 ) }{ \ln \left ( 1 + \frac{ r } { 100 } \right ) } \simeq \frac{ 72 }{ r } \\ &\textbf{where:}\\ &T = \text{Time to double} \\ &\ln = \text{Natural log function} \\ &r = \text{Compounded interest rate per period} \\ &\simeq = \text{Approximately equal to} \\ \end{aligned} 
​	  
T= 
ln(1+ 
100
r
​	 )
ln(2)
​	 ≃ 
r
72
​	 
where:
T=Time to double
ln=Natural log function
r=Compounded interest rate per period
≃=Approximately equal to
​	 


To find out exactly how long it would take to double an investment that returns 8% annually, you would use the following equation:

T = ln(2) / ln(1 + (8 / 100)) = 9.006 years, which is very close to the approximate value obtained by (72 / 8) = 9 years
Since people cannot do logarithmic functions instantly without the help of log tables or scientific calculators, they can rely on the simpler version that uses the factor of 72 and gets almost the same result. If it takes 9 years to double a $1,000 investment, then the investment will grow to $2,000 in year 9, $4,000 in year 18, $8,000 in year 27, and so on.

Question 47

Common Stock

Answer 47

common stock does, usually at one vote per share owned. Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders. Common stock represents shares of ownership in a corporation and the type of stock in which most people invest. When people talk about stocks they are usually referring to common stock. In fact, the great majority of stock is issued is in this form.

Question 48

Preferred Stock and voting rights

Answer 48

preferred stock usually do not give shareholders voting rights,
Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.A main difference from common stock is that preferred stock comes with no voting rights. So when it comes time for a company to elect a board of directors or vote on any form of corporate policy, preferred shareholders have no voice in the future of the company. In fact, preferred stock functions similarly to bonds since with preferred shares, investors are usually guaranteed a fixed dividend in perpetuity

Question 49

Small Cap Companies

Answer 49

companies with market caps less than 2 billion. Typically, newer companies, great risk, higher potential on return. Examples: 1-800 flowers, Fitbit.

Question 50

Mid Cap Companies

Answer 50

Companies with market caps between 2 billion and 10 billion. High potential for growth and deemed risker. Examples: Matel, Dunkin Brands Group In, Fair Isaac Corporation aka FICO.

Question 51

Large Cap Companies

Answer 51

Companies with 10 billion or above, more stable, less risky before and after recession. Current examples, Walmart, Apple, Google.

Question 52

Face Value

Answer 52

Face value describes the nominal value or dollar value of a security; the face value is stated by the issuing party.

Question 53

A stocks face value is

Answer 53

A stock’s face value is the initial cost of the stock, as indicated on the certificate of the stock in question; a bond’s face value is the dollar figure due to be paid to the investor, once the bond reaches maturity.

Question 54

The actual market value of a stock or bond is not

Answer 54

The actual market value of a stock or a bond is not reliably indicated by its face value, because there are many other influencing forces at play, such as supply and demand.

Question 55

Treasury Bonds

Answer 55

Treasury bonds (T-bonds) are government debt securities that are issued by the U.S. Federal government and sold by the U.S. Treasury Department. T-bonds pay a fixed rate of interest to investors every six months until their maturity date, which is in 20-30 years.1
bonds can be a good investment for those looking for safety and a fixed rate of interest that's paid semiannually until the bond's maturity.T-bonds mature in 30 years and offer investors the highest interest payments bi-annually.

Question 56

Treasury Notes

Answer 56

Also known as T-notes, treasury notes, are similar to T-bonds, but are offered in a wide range of terms as short as two years and no longer than 10 years.4 T-notes also generate interest payments twice a year. But because the terms offered by T-notes are lower than T-bonds, they offer lower yields.5

The 10-year T-note is the most closely watched government bond. It is used as a benchmark rate for banks to calculate mortgage rates.

Treasury notes also are auctioned by the U.S. Treasury and are sold in $100 increments. The price of the note may fluctuate based on the results of the auction. It may be equal to, less than, or greater than the note’s face value. T-notes mature anywhere between two and 10 years, with bi-annual interest payments, but lower yields.

Question 57

Corporate Bonds

Answer 57

Corporate bonds tend to pay a higher yield than Treasury bonds since corporate bonds have default risk, while Treasuries are guaranteed if held to maturity.

Question 58

3 types of government issued fixed income

Answer 58

Treasury bonds, Treasury bills, and Treasury notes are all government-issued fixed income securities that are deemed safe and secure.

Question 59

U.S. Savings Bonds

Answer 59

A U.S. savings bond is a government bond offered to its citizens to help fund federal spending, and which provides savers with a guaranteed, although modest, return. These bonds are issued with zero coupon at a discount with an implied fixed rate of interest over a fixed period of time.

For instance, Series EE savings bonds are sold at 50% of their face value, and mature to their full value after 20 years.U.S. savings bonds are a form of government debt issued to American citizens to help fund federal expenditures.
Savings bonds are sold at a discount and mature to their full face value, and do not pay regular coupon interest.

Question 60

Series EE bond

Answer 60

eries EE Bonds are interest-bearing U.S. government savings bonds guaranteed to at least double in value over their typical 20-year initial terms.
Some Series EE bonds pay interest beyond the original maturity date, up to 30 years from issuance.
There is a $25 minimum investment requirement for EE bonds.
Every investor may purchase up to $10,000 in these bonds each calendar year.

Question 61

Series I Bond

Answer 61

A series I bond is a non-marketable, interest-bearing U.S. government savings bond.
Series I bonds give investors a return plus protection on their purchasing power and are considered a low-risk investment.
The bonds cannot be bought or sold in the secondary markets.
Series I bonds earns are a fixed interest rate for the life of the bond for an inflation rate that is adjusted each May and November.

Question 62

Corporate Bonds

Answer 62

Corporate bonds are considered to have a higher risk than government bonds, which is why interest rates are almost always higher on corporate bonds, even for companies with top-flight credit quality.
The backing for the bond is usually the ability of the company to pay, which is typically money to be earned from future operations, making them debentures that are not secured by collateral.
Credit risks are calculated based on the borrower’s overall ability to repay a loan according to its original terms.
To assess credit risk on a consumer loan, lenders look at the five Cs: credit history, capacity to repay, capital, the loan’s conditions, and associated collateral.

Question 63

Municipal Bonds

Answer 63

If your primary investing objective is to preserve capital while generating a tax-free income stream, municipal bonds are worth considering. Municipal bonds (munis) are debt obligations issued by government entities. When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period.1

 At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you. bonds are good for people who want to hold on to capital while creating a tax-free income source.
General obligation bonds are issued to raise funds right away to cover costs, while revenue bonds are issued to finance infrastructure projects.
Both general obligation bonds and revenue bonds are tax-exempt and low-risk, with issuers very likely to pay back their debts.
Buying municipal bonds is low-risk, but not risk-free, as the issuer could fail to make agreed-upon interest payments or be unable to repay the principal upon maturity.

Question 64

Investment Grade Bond

Answer 64

An investment grade is a rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bond rating firms like Standard & Poor’s and Moody’s use different designations, consisting of the upper- and lower-case letters “A” and “B,” to identify a bond’s credit quality rating.

“AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (“BB,” “B,” “CCC,” etc.) are considered low credit quality, and are commonly referred to as “junk bonds.”
An investment-grade rating signals that a corporate or municipal bond has a relatively low risk of default.
Different bond rating agencies have different rating symbols, to signify investment grade bonds.
Standard and Poor’s awards a “AAA” rating to companies it deems least likely to default.
Moody’s awards an “Aaa” rating to companies it considers to be the least likely to default.