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Marketplace Test Guide Flashcards
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Marketplace Test Guide Flashcards

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Questions and Answers

When would it be a good idea to put your money in a savings account instead of investing it?

When you're looking to maintain the value of your money with a little bit of growth.

When would it be a good idea to invest your money instead of putting it in a savings account?

When you won't need the money for a long time.

Which of the following statements about investing is FALSE?

  • Investing involves some level of risk.
  • Investing should be done for long-term financial goals.
  • Investing can provide higher returns than savings accounts.
  • Investing is best when you're looking to maintain the value of your money with a little bit of growth. (correct)
  • Why might an investor want to invest in the stock market?

    <p>Investing in companies through the stock market offers a chance to share in their profits, and usually provides a higher return than interest earned on a savings account.</p> Signup and view all the answers

    People invest in the stock market because:

    <p>The time value of money states that money available now is worth more than the same amount of money later because of its potential to grow. = Reason 1 Investing in companies through the stock market offers a chance to share in the profits of those companies. = Reason 2 Investing in the stock market generally offers a higher return than interest earned on a savings account. = Reason 3</p> Signup and view all the answers

    Which of the following is NOT a reason why people invest in the stock market?

    <p>Investing is a guaranteed way to make money.</p> Signup and view all the answers

    Historically, long-term returns of the stock market have been negative.

    <p>False</p> Signup and view all the answers

    In the past 90 years, the stock market has had positive returns, averaging 10% annually.

    <p>True</p> Signup and view all the answers

    A ______ is a fixed income investment that represents a loan from an investor to a borrower.

    <p>Bond</p> Signup and view all the answers

    A _____ is a short-term investment that is considered highly liquid.

    <p>Cash Equivalent</p> Signup and view all the answers

    A _____ is a share of ownership in a company.

    <p>Stock</p> Signup and view all the answers

    Which of the following statements about stocks is FALSE?

    <p>Stocks pay out interest annually.</p> Signup and view all the answers

    Which of the following statements about bonds is TRUE?

    <p>When a bond matures, you get the full amount you loaned back with interest.</p> Signup and view all the answers

    Which of the following statements about cash equivalents is FALSE?

    <p>Cash equivalents yield higher returns than stocks.</p> Signup and view all the answers

    Which of the following is NOT a consideration when determining your asset allocation?

    <p>Portfolio diversification</p> Signup and view all the answers

    How comfortable you feel taking the risk of losing your money refers to:

    <p>Risk tolerance</p> Signup and view all the answers

    How long you plan to keep your investments in your portfolio refers to:

    <p>Time horizon</p> Signup and view all the answers

    Miguel is 25 years old, has low financial health, a long time horizon and a high risk tolerance. Which asset allocation would you recommend?

    <p>85% stocks and 15% bonds/cash equivalents.</p> Signup and view all the answers

    Yena is 38 years old, has average financial health, an intermediate time horizon, and an average risk tolerance. Which asset allocation would you recommend?

    <p>65% stocks and 35% bonds/cash equivalents.</p> Signup and view all the answers

    Jason is 58 years old, has strong financial health, a short time horizon, and an average risk tolerance. Which asset allocation would you recommend?

    <p>45% stocks and 55% bonds/cash equivalents.</p> Signup and view all the answers

    What is diversification?

    <p>An investment strategy that mixes a wide variety of investments from different categories within a portfolio.</p> Signup and view all the answers

    ___________ is an investment strategy that mixes a wide variety of investments from different categories within a portfolio.

    <p>Diversification</p> Signup and view all the answers

    A well diversified portfolio needs about 3 to 5 stocks from different categories.

    <p>False</p> Signup and view all the answers

    You can diversify your portfolio by investing all your money in one industry.

    <p>False</p> Signup and view all the answers

    A well-diversified portfolio needs about 20-25 stocks from different categories.

    <p>True</p> Signup and view all the answers

    How is a mutual fund different than an index fund?

    <p>Mutual funds are actively managed while index funds are passively managed.</p> Signup and view all the answers

    How is an index fund different than an exchange-traded fund?

    <p>Exchange-traded funds trade directly on stock exchanges while index funds do not.</p> Signup and view all the answers

    Study Notes

    Savings vs. Investment

    • Savings accounts are ideal for maintaining value with minimal growth, suitable for short-term needs.
    • Investing is preferable when the money can be set aside for a long period, allowing for potentially higher returns.

    Misconceptions about Investing

    • A common misconception is that investing aims solely at preserving money's value with slight growth.
    • Investing is not a guaranteed way to make money; it involves risks.

    Stock Market Fundamentals

    • Investing in the stock market allows individuals to share in company profits and typically offers higher returns than savings accounts.
    • The time value of money emphasizes that current funds hold greater value due to their growth potential.

    Historical Stock Market Performance

    • Long-term stock market returns have been positive, averaging 10% annually over the past 90 years.

    Financial Instruments

    • Bonds represent fixed-income investments where investors lend money to borrowers, receiving the principal plus interest upon maturity.
    • Cash equivalents are highly liquid, short-term investments, while stocks represent ownership shares in companies.

    Bonds and Cash Equivalents

    • Bonds return the initial loan amount along with interest upon maturity.
    • Misconceptions about cash equivalents include their perceived riskiness; they are considered low risk.

    Asset Allocation Considerations

    • Important factors for asset allocation include risk tolerance (the ability to endure losses) and time horizon (the duration for holding investments).
    • Portfolio diversification is crucial, but it shouldn't confuse with individual asset allocations.
    • For a 25-year-old with high risk tolerance and a long time horizon, an allocation of 85% stocks to 15% bonds/cash equivalents is advisable.
    • A 38-year-old with average financial health and risk tolerance may benefit from a 65% stock to 35% bonds/cash equivalents ratio.
    • A 58-year-old with strong financial health and a short time horizon should consider a 45% stock to 55% bonds/cash equivalents allocation.

    Diversification Strategy

    • Diversification involves mixing various investments from different categories within a portfolio, critical for risk management.
    • A well-diversified portfolio typically requires 20-25 stocks across different sectors, contrary to the belief that 3-5 stocks suffice.

    Fund Management Styles

    • Mutual funds are actively managed by professionals, while index funds follow a passive management strategy.
    • Exchange-traded funds (ETFs) are traded directly on stock exchanges, differing from index funds which do not trade in this manner.

    Entrepreneurial Definition

    • An entrepreneur is an individual who initiates a new business and assumes all associated risks and rewards.

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    Description

    This flashcard set focuses on financial decision-making, particularly the choice between savings accounts and investments. It covers scenarios where each option is most beneficial, enhancing understanding of personal finance concepts.

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