Economics - Cali

Investment

Redirecting resources from being consumed today so they can create benefits in the future.

Investment in economics

Using assets to earn income or profit.

How investment helps the economy

It promotes economic growth and adds to a nation’s wealth.

Financial system

A system with savers and borrowers that allows money to move between them.

Saver

A person who saves money and is basically lending funds to others.

Borrower

A person, business, or government that receives funds and is expected to repay them.

Financial claim

Documentation that shows a saver has a claim on the borrower’s property or income.

Financial intermediary

An institution that helps move funds from savers to borrowers.

Banks and credit unions

Financial intermediaries that take deposits from savers and lend some of the money to businesses and individuals.

Finance company

A company that makes loans to consumers and small businesses.

Why finance companies charge higher rates

They often lend to riskier borrowers, so they charge more to cover possible losses.

Mutual fund

A fund that pools money from many people and invests it in stocks, bonds, and other assets.

Why mutual funds are useful

They let people invest in a broad range of companies instead of only one.

Hedge fund

A private investment organization that uses risky strategies to try to earn large profits.

Hedge fund investor requirement

Investors usually must have high income or high net worth to invest.

Life insurance company

A company that provides financial protection to the family or beneficiaries of the insured person.

Premium

A payment made by someone who buys insurance.

Pension fund

A retirement fund that pays income to workers after they retire.

Employer pension contribution

Money an employer adds to a worker’s pension fund.

Financial intermediary advantage: shared risk

Risk is spread across many investments or people.

Diversification

Spreading investments across many options to reduce risk.

Financial intermediary advantage: shared information

Intermediaries provide required information to potential investors.

Financial intermediary advantage: liquidity

They help investors convert assets into cash more easily.

Liquidity

The ability to convert an asset into cash.

Risk vs. return

Riskier investments may have higher returns, but they also have a greater chance of loss.

Safe investment return

Safe investments usually have lower returns.

Credit risk

The risk that a borrower may not pay you back or may pay late.

Liquidity risk

The risk that you may not be able to turn an investment into cash quickly enough.

Inflation risk

The risk that inflation will reduce the value of your money or assets.

Time risk

The risk that your money is locked up and you miss better investment opportunities.

Piggy bank

A very safe way to hold money, but it earns no return and loses value from inflation.

Savings account

A very safe bank account that earns a small amount of interest.

Savings account protection

Savings accounts are federally protected up to $250,000.

Money market account

A safe account that usually earns more than a savings account but often requires a larger deposit.

Certificate of Deposit

A deposit account where money is locked in for a set time in exchange for higher interest.

CD maturity

The length of time money must stay in a CD before withdrawal.

CD advantage

It usually earns more interest than a savings or money market account and is FDIC protected.

CD disadvantage

It has time risk and liquidity risk because your money is locked up.

Bond

A loan or IOU that a government or corporation must repay to an investor.

Coupon rate

The interest rate the bond issuer pays the bondholder.

Bond maturity

The time an investor must wait before getting the bond’s return.

Par value

The amount an investor pays to buy a bond.

Bond rating

A measure of how risky a bond is.

Higher bond rating

Usually means lower risk and lower return.

Lower bond rating

Usually means higher risk and higher return.

U.S. Treasury securities

Bonds, bills, and notes issued by the U.S. government.

Treasury bond

A long-term U.S. government security with a maturity of about 10 to 30 years.

Treasury note

An intermediate-term U.S. government security with a maturity of about 2 to 10 years.

Treasury bill

A short-term U.S. government security with a maturity of about 3, 6, or 12 months.

U.S. Treasury advantage

It is backed by the U.S. government and is considered very safe.

U.S. Treasury disadvantage

It can have time risk and liquidity risk.

Savings bond

A low-denomination bond issued by the U.S. government.

Savings bond interest

It does not pay regular interest. It is bought for less than par value and matures later.

Municipal bond

A bond issued by state or local governments for projects like roads, schools, parks, and libraries.

Municipal bond advantage

It is usually safe and may offer more return than federal bonds.

Municipal bond disadvantage

It can be riskier than federal bonds and has time and liquidity risk.

Corporate bond

A bond issued by a corporation to raise money for business expansion.

Corporate bond advantage

It usually offers larger returns than safer government bonds.

Corporate bond disadvantage

It has time risk and liquidity risk.

Junk bond

A high-risk, high-reward bond.

Junk bond risk

You could earn a lot, but you could also lose it all.

401(k)

An employer-sponsored retirement plan that allows workers to save pre-tax income.

403(b)

A retirement plan for employees of nonprofit institutions.

457 plan

A retirement plan for government employees.

Employer match

Money an employer contributes to your retirement plan based on what you contribute.

Why employer match matters

It is basically free money for retirement savings.

Pre-tax contribution

Money put into a retirement account before income taxes are taken out.

401(k) tax treatment

Contributions are not taxed now, but withdrawals are taxed in retirement.

IRA

An individual retirement account that people can use to save for retirement.

Traditional IRA

An IRA with tax-deferred growth where taxes are usually paid when money is withdrawn.

Roth IRA

An IRA funded with after-tax money, so qualified retirement withdrawals are tax-free.

Stock

Ownership in a corporation.

Share

A portion of stock in a company.

Why corporations issue stock

To raise money to start, run, or expand their business.

Initial Public Offering

A company’s first sale of stock to the public.

IPO

Short for initial public offering, when a company first offers stock to the public.

Brokerage firm

A business that specializes in trading stocks.

Stockbroker

A person who connects buyers and sellers of stocks.

Commission

A fee charged on a stock transaction.

Common stock

Stock that gives investors voting ownership in a company.

Common stock voting rights

Common stockholders usually get one vote per share.

Variable dividend

A dividend that can change depending on the company’s profits.

Preferred stock

Stock that gives nonvoting ownership and usually pays fixed dividends first.

Preferred stock advantage

Preferred stockholders receive dividends before common stockholders.

Blue chip stock

Stock from a strong, reliable company with a long history of growth.

Income stock

Stock bought mainly because it pays dividends regularly.

Cyclical stock

Stock affected by the ups and downs of the economy.

Defensive stock

Stock that stays more stable during economic downturns.

Penny stock

A low-priced stock that is very risky because the company has not proven itself.

Dividend

Part of a company’s profits paid to stockholders.

Capital gain

Profit earned when a stock is sold for more than it cost.

Day trader

A person who makes many stock trades in one day to try to earn profit.

Why stock prices rise

More investors want to buy the stock than sell it.

Why stock prices fall

More investors want to sell the stock than buy it.

Speculation

Buying or selling based on guesses about future price changes.

Stock split

When one share of stock is divided into multiple shares to lower the price per share.

Bull market

A period when the stock market rises steadily.

Bear market

A period when the stock market falls.

NYSE

The New York Stock Exchange, a major U.S. stock exchange on Wall Street.

NASDAQ

An electronic stock market where stocks are traded by computer.