Saving & Investing Flashcards
What should you consider when comparing savings accounts at different financial situations?
1- find out regulations & fees on the account
2- compare the interest rates on the savings account
Savings account-
An account that earns interest on the amount deposited but the funds can’t be directly accessed. Considered a liquid account because you are able to withdraw money at any time.
Rate of return-
The percentage of increase in the value of your savings from earned interest
Compounding-
The process of earning interest in interest that you’ve already earned
Saving-
The act of accumulating money
Investing-
The act of using money to purchase some assets in the hopes of generating more money.
What do many people use as part of their financial planning strategy?
Investments
Steps to investing-
1- make sure that investing fits into your particular financial plans & goals
2- create a plan & goals for investments
What is recommend to have before you begin investing?
an emergency fund, other sources of access to money in case of emergency & adequate life, medical, home & other insurances. Also a balanced budget.
What is one of the factors that influence where individuals invest their money?
Relative risk & safety of investment.
Speculative investments-
High risk investments with the possibility of high returns in a short period of time.
The potential return on any investment should be directly related to the risk the investor assumes.
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Inflation-
Can influence investment choices. An increase in the general levels of prices for goods.
If the return on an investment is growing at a greater rate than the inflation rate?
The investment will increase your purchasing power.
If the interest rate for other investments rises while yours stays the same?
You are losing out on a greater return on your investment. If the interest rate falls the value of your investment grows.
What are some factors that can cause a business to fold?
Bad management, competition, or unsuccessful products.
Asset allocation-
When someone invests in a variety of places to reduce the overall risk on investing.
Asset classes-
The broad types of investments that have common characteristics.
Stock-
A share in the ownership of a company
Dividends-
periodic distribution of profits to investors
Bonds-
Common long term investment choice. Has fixed dates at which time the borrower promises to repay the bond holder in full. Borrower pays periodic interest which is usually set.
Government bonds-
Written my a municipality with the agreement to repay the amount of the bond plus interest on a particular maturity date. Backed by the government & are relatively risk free.
T-bills-
sold in increments of $1,000 & have varying maturity dates. Sold at lower amounts with the government repaying $1,000 when the T-bill matures.
Treasury bonds-
Sold in $1,000 increments & have a 30 year maturity date.
Treasury Inflation Protected Securities-
Sold in $1,000 increments with 5-,10-, or 20- year maturity dates. Principle of this bond raises & falls according to deflation & maturity date. Amount paid is either adjusted it the original depending on which is higher
Municipal bonds-
Debt securities issued by state or local governments to pay for ongoing products such as roads, schools & airports. Generally safe investments. Interest earned may be exempt from US federal taxes.
What are the two type of securities ?
General obligation bonds & revenue bonds.
General obligation bonds-
Backed by the taxing power & credit of the government.
Revenue bonds-
Backed by profits from the project for which the bond was issued.
Corporate bonds-
Agreements by a company to pay a specific Amount of money at the maturity date. Generally $1,000. Interest is paid on the amount of the bond & maturity dates are between 1-30 years
Bond indenture-
Come with corporate bonds. Is a legal document that outlines all of the conditions of the bond.
Trustee-
An independent firm or institution. Oversees bond indentures to make sure companies uphold its obligations
Preferred stocks-
share characteristics with both common stocks & corporate bonds. Give owners a share in the company but has a fixed dividend every year that provides a consistent flow of income to the owner. Risky investments
Mutual funds-
Take investors money & invests it in stocks, bonds, & other investments. Managed by a financial professional who decides which stocks, bonds, & other investments to include in the mutual fund they manage.
Direct Stock plans-
Purchased directly from a company. May only be offered to employees or other stock owners.
Stock brokers-
professionals act for the investor in buying & selling stock.
Individuals have to choose whether to save or invest since it’s not recommended to do both.
FALSE