Investing Basics and Key Concepts
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Questions and Answers

What is investing?

  • The use of long-term savings to earn a financial return (correct)
  • A technique for estimating the number of years required to double your money
  • A collection of investments
  • A rise in the general level of prices

    • Define inflation.

    A rise in the general level of prices.

    What is the Rule of 72?

    A technique for estimating the number of years required to double your money at a given rate of return.

    What is a portfolio?

    <p>A collection of investments.</p> Signup and view all the answers

    What is investing risk?

    <p>The chance that an investment's value will decrease.</p> Signup and view all the answers

    Define diversification.

    <p>The spreading of risk among many types of investments.</p> Signup and view all the answers

    What are temporary investments?

    <p>Investment choices that will be reevaluated within a year or less.</p> Signup and view all the answers

    What are permanent investments?

    <p>Investment choices that will be held for the long run - five or 10 years, or longer.</p> Signup and view all the answers

    Define an annual report.

    <p>Summary of a corporation's financial results for the year and its prospects for the future.</p> Signup and view all the answers

    What are bonds?

    <p>Debt obligations of corporations or state or local governments.</p> Signup and view all the answers

    Define a discount bond.

    <p>A savings bond purchased for less than the maturity value.</p> Signup and view all the answers

    What is a stock?

    <p>A unit of ownership in a corporation.</p> Signup and view all the answers

    What is a mutual fund?

    <p>The pooling of money from many investors to buy a large selection of securities.</p> Signup and view all the answers

    Define an annuity.

    <p>A contract that provides an investor with a series of regular payments, usually after retirement.</p> Signup and view all the answers

    What are futures?

    <p>Contracts to buy and sell commodities or stocks for a specified price on a specified date in the future.</p> Signup and view all the answers

    Define an option.

    <p>The right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time.</p> Signup and view all the answers

    What are penny stocks?

    <p>Low-priced stocks of small companies that have no track record.</p> Signup and view all the answers

    What is a put-and-take account?

    <p>Stage 1 of Investing: establishing an account that provides safety of principal.</p> Signup and view all the answers

    What is initial investing?

    <p>Stage 2 of Investing: conservative investing with low risk.</p> Signup and view all the answers

    Define systematic investing.

    <p>Stage 3 of Investing: investing on a regular and planned basis.</p> Signup and view all the answers

    What is strategic investing?

    <p>Stage 4 of Investing: the careful management of investment alternatives to maximize growth of your portfolio over the next 5-10 years.</p> Signup and view all the answers

    What is speculative investing?

    <p>Stage 5 of Investing: making bold and high-risk investment choices.</p> Signup and view all the answers

    Define interest-rate risk.

    <p>The chance that inflation will rise faster than the return on your investments.</p> Signup and view all the answers

    What is political risk?

    <p>The actions the government might take that would reduce the value of your investment.</p> Signup and view all the answers

    Define market risk.

    <p>Type of risk caused by the business cycle - periods of economic growth and decline.</p> Signup and view all the answers

    What is nonmarket risk?

    <p>Unpredictable and uncontrollable risk that is unrelated to market trends.</p> Signup and view all the answers

    Define Series EE Savings Bonds.

    <p>(Discount bonds) bonds purchased for half the maturity value.</p> Signup and view all the answers

    What are Series I Savings Bonds?

    <p>Bonds purchased at face value that offer interest and protect against inflation.</p> Signup and view all the answers

    Define U.S. Treasury Bills.

    <p>Type of treasury security purchased for a minimum of $100. The maturity date is from a few days to one year.</p> Signup and view all the answers

    What are U.S. Treasury Notes?

    <p>Type of treasury security purchased for a minimum of $100. The maturity date is 2, 5, or 10 years.</p> Signup and view all the answers

    Define U.S. Treasury Bonds.

    <p>Type of treasury security purchased for a minimum of $100. The maturity date is 30 years. Interest is higher than that of notes or bills because of the longer maturity.</p> Signup and view all the answers

    Study Notes

    Investing Basics

    • Investing involves using long-term savings to generate financial returns.
    • Investment risk refers to the probability of loss in the value of an investment.
    • Diversification spreads risk across various investment types, reducing potential losses.

    Key Financial Concepts

    • Inflation signifies a general increase in prices, affecting purchasing power.
    • The Rule of 72 helps estimate how quickly an investment will double by dividing 72 by the annual rate of return.
    • A portfolio is a collection of different investments held by an individual or entity.

    Types of Investments

    • Temporary investments are evaluated annually, while permanent investments are held for five years or more.
    • Bonds are debt securities issued by corporations or governments, obligating them to repay the face value.
    • Stocks represent ownership shares in a corporation, fluctuating in value based on company performance.
    • Mutual funds combine money from multiple investors to purchase a diverse range of securities.

    Investment Vehicles

    • Annuities provide regular payments, typically after retirement, as a form of income.
    • Futures contracts involve agreeing to buy or sell an asset at a future date for a predetermined price.
    • Options give investors the right, but not the obligation, to buy or sell a security at a specified price within a certain timeframe.

    Investment Stages

    • The Put-and-Take account is the initial stage of investing, emphasizing principal safety.
    • Initial Investing involves conservative strategies with low risk.
    • Systematic Investing includes regular, planned contributions to investments.
    • Strategic Investing focuses on maximizing portfolio growth over five to ten years.
    • Speculative Investing entails high-risk decisions aiming for significant returns.

    Investment Risks

    • Interest-rate risk arises when inflation increases faster than investment returns.
    • Political risk pertains to government actions that may diminish investment value.
    • Market risk is influenced by economic cycles, including periods of expansion and contraction.
    • Nonmarket risk includes unpredictable factors unrelated to market trends.

    Specific Investment Types

    • Series EE Savings Bonds are discount bonds sold for half their maturity value.
    • Series I Savings Bonds are bought at face value and offer inflation protection.
    • U.S. Treasury Bills are short-term securities with maturities from a few days to one year.
    • U.S. Treasury Notes have maturities of 2, 5, or 10 years, with a minimum investment of $100.
    • U.S. Treasury Bonds are long-term securities with a maturity of 30 years and typically higher interest rates.

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    Description

    This quiz covers essential investing principles, including risk management, key financial concepts like inflation and portfolio diversification, and various types of investments such as stocks, bonds, and mutual funds. Test your knowledge of how to make informed financial decisions and manage your investments effectively.

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