Investing vs Saving and Compound Interest
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Questions and Answers

How does investing in the stock market differ from putting money in a savings account at a bank?

  • Investing is always a less risky option than saving
  • Investing is best for short-term situations like emergency funds; saving is best for the long-term
  • Investing typically earns between 1-2% while saving generally earns between 5-7%
  • Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies (correct)

Which of the following statements is TRUE about compound interest?

  • Compound interest means you have a fund manager who is compounding your returns without charging a fee
  • Compound interest directly impacts how much you will be charged in fees
  • Compound interest allows you to earn interest not only on the amount you have saved, but also on the interest you've already earned (correct)
  • Compound interest is difficult to calculate, so those who use it earn higher profits for their efforts

What kinds of behaviors can PREVENT people from making smart investing decisions?

  • Buying stocks when prices are low and selling them when they’re high
  • Investing in a diversified portfolio instead of trying to beat the market
  • Exiting the market because that’s what everyone else is doing (correct)
  • Staying calm when the market is experiencing a downturn

Daniel has saved $2,000 in a savings account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time?

<p>His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation (A)</p> Signup and view all the answers

Which of the following accurately describes a difference between an individual bond compared to a bond fund?

<p>A bond is considered to be a less diversified investment than a bond fund (D)</p> Signup and view all the answers

Which of the statements below BEST describes the relationship between risk and return when considering an investment?

<p>Investors expect to earn a higher return when they invest in a high risk asset (A)</p> Signup and view all the answers

Why is diversification a recommended investment strategy?

<p>Diversifying your portfolio helps reduce risk (B)</p> Signup and view all the answers

Which of the following is a characteristic of dollar-cost averaging?

<p>Dollar-cost averaging is a way to decrease your risk (C)</p> Signup and view all the answers

How is a bond different from a stock?

<p>A bond is a loan you give to an organization while a stock is partial ownership in a company (C)</p> Signup and view all the answers

Flashcards

Investing vs. Saving

Investing in the stock market allows you to grow your wealth over time, while saving is best for short-term needs or emergencies. The stock market offers potential for higher returns but also carries greater risk.

What is compound interest?

Compound interest means earning interest on your initial investment, as well as on the interest you've already earned. This creates exponential growth over time.

Investing behavior to avoid

Exiting the market when everyone else is selling can lead to losses. Investing should be based on long-term strategies and not impulsive reactions.

Inflation and purchasing power

Inflation erodes the purchasing power of money over time. When the interest rate is lower than inflation, your savings lose value.

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Bond vs. Bond Fund

Individual bonds offer less diversification than a bond fund, meaning your investment is concentrated in a single issuer. Bond funds provide exposure to a variety of bonds, reducing risk.

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Relationship between risk and return

The potential for a higher return is usually associated with a higher risk. This means investments with the potential for greater profit also carry a greater chance of losing money.

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Why is diversification important?

Diversification means spreading your investments across different asset classes (stocks, bonds, real estate) and sectors. It helps reduce overall portfolio risk by not putting all your eggs in one basket.

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What is dollar-cost averaging?

Dollar-cost averaging helps minimize risk by investing a fixed amount of money at regular intervals. This strategy smooths out market fluctuations and avoids buying high and selling low.

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Bond vs. Stock

A bond represents a loan you give to a company or government, receiving regular interest payments and repayment of the principal at maturity. A stock represents partial ownership in a company, allowing you to share in its potential profits.

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Study Notes

Investing vs Saving

  • Investing in the stock market allows you to accumulate wealth for retirement
  • Saving is best for short-term purchases or emergencies
  • Saving typically earns between 1-2% interest annually
  • Investing can earn a higher return than saving, but carries more risk

Compound Interest

  • Compound interest allows you to earn interest on both the principal amount and the interest you have already earned
  • This means your money grows faster over time

Investment Mistakes

  • Exiting the market because others are doing so can lead to poor investment decisions
  • Staying calm during market downturns is important for sound investment

Purchasing Power

  • Inflation can decrease the purchasing power of your savings
  • Investing in a diversified portfolio can help mitigate the impact of inflation
  • A savings account with a low interest rate may not keep up with inflation

Bonds vs Bond Funds

  • Bonds are a loan you give to an organization
  • Bond funds are a diversified investment that invests in a variety of bonds
  • Bond funds are less risky than individual bonds because they are diversified

Risk and Return

  • Investors typically expect to earn a higher return for investing in high-risk assets
  • Investors expect to earn a lower return for investing in low-risk assets

Diversification

  • Diversification helps reduce risk by spreading your investments across different assets
  • A diversified portfolio can help mitigate losses if one investment performs poorly

Dollar-Cost Averaging

  • Dollar-cost averaging is an investment strategy where you invest a set amount of money at regular intervals
  • This strategy can help reduce risk by averaging out the price you pay for your investments

Stocks vs Bonds

  • Stocks represent partial ownership in a company
  • Bonds represent a loan you give to an organization
  • Stocks are typically considered riskier than bonds, but have the potential for higher returns

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Description

Explore the key differences between investing and saving, and learn about the importance of compound interest in growing wealth. Understand common investment mistakes and the impact of inflation on purchasing power. This quiz will equip you with essential financial knowledge for better decision-making.

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