unit 4: investing Flashcards
diversification
the practice of dividing the money a person invests between several different types of investments in order to lower risk
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 their money for long-term growth; investing money should 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
portfolio
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
a 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
what is the 5th foundation of personal finance?
build wealth and give
what is the most important thing you can invest in?
continue your education and stay out of debt
basic rules of investing:
-> KISS principle- keep it simple stupid
-> never invest purely for tax savings- your motivation should be to make money, not save on taxes
-> never invest using borrowed money- if you lose the money, you’re left with more debt
what rate of return do you need on your investments to get above inflation and taxes?
4.2%
CD investment:
a savings account with a slightly higher interest rate because of a longer savings commitment (6 months, one year, etc.)
money market account investment:
a low risk bank savings account with check-writing privileges
single stock investment:
when you buy stock, you are buying a small piece of ownership in the company
bond investment:
a debt instrument by which the company owes you money; the company makes regular interest payments to the bondholder and will pay back the face value of the bond at specified points in the future
which investment is best for your emergency fund?
Money market account. they’re great funds due to their liquidity (accessibility) and stability
how do you make money investing?
invest in a stock, company value increases, they pay a portion of their earnings
dividend:
distribution of a portion of a company’s earning
SEC agency:
the government agency responsible for regulating the stock market
FDIC agency:
the U.S. federal agency that ensures deposits in commercial banks
IRS agency:
the U.S. federal agency responsible for collecting taxes for the interpretation and enforcement of the Internal revenue Code (laws)
federal reserve agency:
the central (federal) banking system of the U.S.
mutual fund:
an investment vehicle that is made up of a pool of money, collected from many investors for the purpose of investing is securities
growth stock mutual fund:
fund that buys stock in medium-sized companies that have experienced some growth and are still expanding
growth and income stock mutual fund:
fund comprised of large, well-established companies
Aggressive Growth Stock mutual fund:
fund that seeks to provide maximum long-term capital growth from stocks of primarily smaller companies; the most volatile fund
International Stock mutual fund
fund that contains international or overseas companies
what is bull market?
occurs when securities are on the rise
what is bear market?
occurs when securities fall for a sustained period of time
What is an IRA? What are the 2 types? How are they different?
-> An Individual retirement account
-> Traditional and Roth
-> traditional: tax-deferred growth potential retirement account
-> Roth: funded with after-tax money, allows you to use the money in your Roth tax-free in retirement provided certain conditions are satisfied
annuities:
A savings account sold by an insurance company, designed to provide payments to the holder at specified intervals, usually after retirement
-> way to protect money from taxes
-> fixed annuities are bad
529 plan:
A savings plan operated by a state or educational institution designed to help families set aside funds for future college expenses
real estate as an investment:
Real estate is land plus anything permanently fixed to it, including buildings and natural resources.
-> investing in real estate is a good thing (flipping houses, renting out apartments/houses)
why is real estate the least liquid investment?
It takes time and it’s difficult to convert land to cash without spending a lot of money
what must you consider when investing in real estate?
-> It’s costly to buy, sell, and maintain
-> It requires management
-> It can be difficult to acquire
-> The investment market is cyclical based on supply and demand
what investments are very risky?
-> Gold: small interest rate
-> Commodities: future contract (agricultural or mining products)
-> day trading: buying and selling of stock purchases each day through practice of speculation
-. Viaticals: ILLEGAL when someone with a terminal disease sells their life insurance policy for less than face value (fraud- people can fake having a disease and pay off a doctor to sign papers)
rule of 72:
Divide 72 by the expected interest rate to determine the number of years or divide 72 by the number of years to get the interest rate it will take to double your money.
should you borrow money from your retirement accounts?
Never! Even though you pay yourself back some interest, it is nowhere close to what you would have earned if you had left the money in the investment. Will pay a penalty (10%) and taxes
SEP retirement plan:
a self-employed person may deduct up to 15% of their net profit on the business by investing in an SEP
401(k) retirement plan:
a retirement savings plan offered by a corporation to its employees
403(b) retirement plan:
found in nonprofit organizations such as churches, hospitals, and schools
457 retirement plan:
deferred compensation, which means you are deferring or putting off compensation
what does it mean by rolling over your retirement accounts?
If you leave a job and have money saved in your employer’s retirement plan, always roll that money into an IRA using a direct rollover, which allows you to avoid taxes and penalties
