Investing Terms Test Study Guide

Flashcards covering essential investing terms, including core principles, investment types, financial metrics, and market dynamics.

What is a portfolio?

A collection of financial assets—such as stocks, bonds, cash, mutual funds, or real estate—held by an investor.

What is diversification?

The practice of spreading investments across various asset classes, industries, and regions to reduce overall risk.

What is asset allocation?

The strategy of dividing an investment portfolio among different asset categories (stocks, bonds, cash) based on goals, age, and risk tolerance.

What is risk tolerance?

An investor's willingness and emotional ability to endure market drops and potential financial losses.

What is a time horizon in investing?

The total period of time an investor expects to hold an investment before needing to access the funds.

How is liquidity defined?

How quickly and easily an asset can be converted into cash without losing significant value.

What is a stock?

A security that represents partial ownership in a public or private corporation.

What is a bond?

A fixed-income instrument that acts as a loan made by an investor to a corporate or government borrower in exchange for interest.

What is a mutual fund?

A professionally managed investment vehicle that pools money from many investors to buy a diversified portfolio of securities.

What is an ETF (Exchange-Traded Fund)?

A basket of securities that tracks an index, sector, or commodity, but trades continuously on a public stock exchange like an individual stock.

What is an index fund?

A low-cost mutual fund or ETF designed to match the performance of a specific market index (e.g., S&P 500).

What is a cash equivalent?

Short-term, highly liquid investments (e.g., Money Market Funds, Treasury Bills) used primarily for safety and fast access to cash.

What is compound interest?

The process where interest is earned on both the original principal and the interest accumulated over previous periods.

What is a dividend?

A distribution of a portion of a company's earnings paid out directly to its shareholders.

What is dividend yield?

The percentage showing how much a company pays out each year in dividends relative to its current share price.

What is a capital gain?

The profit realized when an asset is sold for a higher price than its original purchase price.

What is a capital loss?

The loss realized when an asset is sold for a lower price than its original purchase price.

What is an expense ratio?

The annual percentage fee charged by mutual funds or ETFs to cover management and operating costs.

What is a bull market?

A financial market condition characterized by rising asset prices and overall investor optimism.

What is a bear market?

A market period marked by falling asset prices (typically a drop of $20\%$ or more from recent peaks) and widespread pessimism.

What is volatility in financial markets?

The degree of frequency and magnitude of price fluctuations in an asset over a period of time.

What is inflation?

The rate at which the general cost of goods and services rises, eroding purchasing power over time.

What is market capitalization and how is it calculated?

The total dollar market value of a company's outstanding shares of stock, calculated as $\text{Share Price} \times \text{Total Shares}$.