Investing and Financial Markets Flashcards

Questions and Answers

Which best describes the relationship between risk and return in investments?

High Risk/High Return

Low Risk/Low Return

Both A and C (correct)

Medium Risk/Medium Return

What is the minimum interest an investment needs to earn to come out ahead after inflation and taxes?

What is a bond?

A certificate purchased and later sold back for a higher price, with guaranteed returns.

What does debt refer to in financial terms?

An obligation to pay something. Signup and view all the answers

What is equity?

The monetary value of a property or business. Signup and view all the answers

What does it mean to invest?

To spend money or time on an asset with the hopes that it will increase in value over time. Signup and view all the answers

What is return in the context of investments?

The money earned on an investment in a certain time period. Signup and view all the answers

What is stock?

Partial ownership of a corporation. Signup and view all the answers

What are the two main types of investments?

Debt and equity Signup and view all the answers

What are examples of debt investments?

Bonds Signup and view all the answers

What is the primary way to profit from investing in stocks?

Capital appreciation or dividends. Signup and view all the answers

What are other ways to invest in equity?

Agreements to buy securities or swapping ownership of equity. Signup and view all the answers

What markets involve trading commodities, securities, stocks, and bonds?

Financial markets Signup and view all the answers

In which markets do investors sell shares of their company?

Stock markets. Signup and view all the answers

How is market performance tracked?

By indexes. Signup and view all the answers

How do investors make money from an equity investment?

By selling the asset for a profit. Signup and view all the answers

What generally occurs in financial markets?

Assets are traded. Signup and view all the answers

What are the most likely uses of capital invested in a business?

All of the above Signup and view all the answers

If a company pays dividends on a stock, does it mean that the stock has appreciated in value?

False Signup and view all the answers

How are stock prices set once they are on the market?

Prices fluctuate based on demand. Signup and view all the answers

What does capital appreciation refer to?

The increased value of an asset. Signup and view all the answers

What is the term for the possibility of an investor losing some or all of an investment?

Risk. Signup and view all the answers

What describes an investor's primary goal of buying a loan?

To earn a profit off the interest. Signup and view all the answers

What can be traded in a commodities market?

Oil. Signup and view all the answers

How do bonds generate income for investors?

Bonds pay a specified amount at maturity. Signup and view all the answers

Study Notes

Investment Types and Risk

Investment spans a spectrum from low risk/low return (e.g., exporting, licensing) to high risk/high return (e.g., direct investment).
A yield of at least 6% interest is needed for an investment to be profitable after accounting for inflation and taxes.

Bonds and Debt

A bond is a debt investment, representing a certificate purchased at a specified price, with interest paid back over time.
Bonds can include US government securities, municipal bonds, and corporate bonds, guaranteeing a return upon maturity.
Debt signifies an obligation to fulfill a payment.

Equity

Equity denotes the monetary value inherent in a property or business, representing ownership.
Stocks indicate partial ownership of a corporation, with investment returns deriving from capital appreciation or dividends.

Returns and Investments

Return is defined as the financial gain from an investment over a designated period.
Investing, whether in time or capital, aims for value appreciation of assets.
Types of investments include debt (bonds) and equity (stocks).

Stock Market Mechanics

Investors generate profit from equities by selling assets at higher prices.
Stock markets around the world provide venues for trading shares of companies.
Market performance is assessed through indexes, reflecting asset trading activities.

Capital Utilization

Capital invested in businesses is typically allocated to hiring, production, distribution, and material acquisition.
Payment of dividends does not necessarily correlate with stock appreciation but rather indicates the company's profit generation.

Stock Valuation and Risk

Stock prices fluctuate based on market demand, reflecting the principles of supply and demand.
Capital appreciation refers to the increase in an asset's value over time.
Risk pertains to the potential loss of investment capital.

Profits from Loans and Commodities

Investors seek to profit from loans mainly through interest payments.
Commodities such as oil can be traded in specialized markets, presenting additional investment avenues.
Bonds generate income by providing specified payments at maturity, contributing to investor returns.

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Description

Test your knowledge on key concepts in investing and financial markets with these flashcards. From risk-return profiles to the significance of bond investments, this quiz covers essential terms and definitions that every investor should understand.