Economics and Investment: Key Concepts and Formulas

Economics

The study of how people businesses and governments use resources to produce buy and sell goods and services

Gross Domestic Product GDP

Total value of all final goods and services produced in a country in a specific time period • Measures economic size • Formula GDP = C + I + G + X − M • C consumer spending • I investment • G government spending • X − M exports minus imports

Inflation

A sustained increase in the general price level of goods and services • Reduces purchasing power

Consumer Price Index CPI

Measures changes in prices of a basket of consumer goods and services • Used to measure inflation

Demand Pull Inflation

Inflation caused when demand exceeds supply

Cost Push Inflation

Inflation caused by rising production costs passed to consumers

Built In Inflation

Inflation caused by rising wages to keep up with higher prices

Hyperinflation

Extremely rapid and uncontrolled inflation with exponential price increases

Deflation

A sustained decrease in the general price level of goods and services

Business Cycle

Natural rise and fall of economic activity • Includes prosperity recession depression and recovery

Unemployment Rate

Percentage of the labor force that is unemployed and actively seeking work

Labor Force

All employed and unemployed people actively looking for work

Compound Interest

Interest earned on the principal and previously earned interest • Formula A = P(1 + r/n)^(nt) • A final amount • P principal • r interest rate • n number of times compounded • t time

Checking Account

Bank account for daily spending • Uses debit cards checks and transfers

Savings Account

Account for storing money while earning interest • Low risk and low returns

Money Market Account

Savings account with higher interest • Limited check writing

Certificate of Deposit CD

Savings account with fixed interest and fixed term • Early withdrawal penalty

APY Annual Percentage Yield

Total interest earned in one year including compounding

Initial Public Offering IPO

First sale of a company's stock to the public

Common Stock

Represents ownership in a company • Voting rights • Possible dividends

Preferred Stock

Pays fixed dividends • Priority over common stock • Usually no voting rights • Often has extra letters in ticker

Dividends

Company profits paid to shareholders

Capital Gains

Profit made from selling an investment for more than its purchase price

Blue Chip Stocks

Stocks of large stable well established companies

Penny Stocks

Stocks trading under five dollars • High risk and volatile

Diversification

Spreading investments across different assets to reduce risk

Quarterly Reports

Financial reports released every three months • Show revenue profit and performance

Market Speculation

Investing based on expected price changes instead of true value

Insider Trading

Illegal buying or selling of stock using non public information

Short Selling

Selling borrowed stock expecting price to fall then buying it back cheaper

Securities and Exchange Commission SEC

Government agency that regulates the stock market and protects investors

Federal Deposit Insurance Corporation FDIC

Insures bank deposits up to 250000 dollars per account

Mutual Funds

Pooled investments managed by professionals • Invest in stocks bonds and more

Exchange Traded Funds ETFs

Funds that track an index or sector and trade like stocks

Actively Managed Funds

Managed by professionals attempting to outperform the market

Passively Managed Funds

Track an index using a buy and hold strategy

Sector Funds

Invest in one specific industry such as technology or healthcare

Commodities

Basic goods traded on markets such as gold oil and corn

Expense Ratio

Annual fee charged by funds shown as a percentage

401k

Employer sponsored retirement plan • Often includes employer match • Tax advantages

403b

Retirement plan for teachers nonprofits and government workers

Roth IRA

After tax contributions • Tax free withdrawals in retirement

Traditional IRA

Pre tax contributions • Taxes paid when withdrawn

457 Plan

Deferred compensation retirement plan for government or nonprofit employees

Employer Match

Employer contributions added to an employee's retirement account

Vesting

Time required to fully own employer contributed retirement funds

Future Value of Contributions

Total value of retirement savings over time • Formula FV = P(1 + r)^n • P annual contribution • r rate of return • n number of years

Rule of 72

Estimates how long an investment takes to double • Formula Years = 72 ÷ interest rate

Rule of 110

Suggests stock allocation • Formula 110 − age = percent invested in stocks