Investment Fundamentals and Retirement Planning Flashcards

Flashcards covering time value of money, investment strategies, stocks, bonds, mutual funds, retirement accounts, and estate planning based on lecture notes.

What is the future value of investing $6000 each year for 20 years with an 8% return?

$274,572

What is the future value of investing $6000 each year for 40 years with an 8% return?

$1,554,342

What is the future value of investing $6000 each year for 20 years with a 4% return?

$178,668

Name 5 elements everyone should perform as a financial checkup before beginning an investment program.

1. Paying your bills on time, 2. Work to balance your budget , 3. Manage your credit card debt, 4. Start an emergency fund, 5. Have access to other sources of cash for emergency needs

Why should an emergency day fund be stored in a “liquid” account?

So that it can earn interest but still be taken out quickly and easily for emergencies

Define liquidity in the context of investments.

The ease/speed that an asset can be turned into cash without impacting its value

Give examples of liquid and non-liquid investments.

Liquid: stocks, bonds, mutual funds, cash, money in bank accounts. Non-liquid: cars/vehicles, real estate, retirement savings accounts

What is the difference between saving and investing?

Savings is putting money away gradually; investing is putting a sum of money into something hoping it will grow.

List some ideas on how to obtain the money needed to establish an investment program.

Create a Budget and Save, establish a side source of income, sell unused items

What is the relationship between risk and potential returns?

Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns.

Do length of time and rate of return matter for investments?

YES

What are the 3 basic steps to begin investing?

Set up an Investment Account, Set up automatic payments, Select investments that will be purchased

What is the risk-return tradeoff?

Relationship between the risk an investor takes and the level of returns they get

Approximately how many years will it take for stocks, bonds, and bank accounts to double in value based on Rule of 72?

Stocks- 8 years, Bonds-14.4 years, Bank Account-72 years

What is the formula to calculate yearly rate of return?

change in investment+annual income/original investments value

Define Asset Allocation

Spreading your assets among several different types of investments.

Define Diversification

Putting your assets in different things

Define Portfolio

All of someone's investments

Companies issue stock to raise money, this is called what?

Equity financing

What are some investment alternatives?

Derivatives, Digital assets, Precious metals, Collectibles, Commodities, Real estate, Private equity

What are two reasons people buy stocks?

They can provide a source of income if the company pays dividends and there is potential for capital appreciation (stock price increases).

What are you doing when someone buys a BOND?

They are loaning a corporation or government money for a given period of time.

Define Maturity Date.

The date on which government or the corporation will repay the borrowed money.

Define Mutual Fund

A mutual fund pools money together from many investors to purchase various stocks, bonds and other assets.

True or False Investing in real estate should be considered a long-term investment, not a get-rich-quick scheme.

True

Define DIVIDEND

A distribution of corporate profits paid out to shareholders.

What are some examples of speculative investments?

Options, Commodities, Derivatives, Bitcoin & other cryptocurrencies, precious metals & gemstones, antiques, collectables

List some sources available to gather investment information.

News programs, business periodicals, newspapers, corporate reports, investor services, newsletters

What is a prospectus?

Written document required by regulatory bodies that provides details about a new offering of securities, such as stocks, bonds, or mutual funds

What is Equity Financing?

Money received from the sale of shares of ownership in a business

How do stockholders earn profit?

From (a distribution of cash quarterly/yearly) or by an increase in stock price.

Based on the Rule of 72, how long would it take for a stock investment earning 10% to double in value?

7.2 years

What is a stock split?

Company divides its existing shares into multiple new shares

How do corporate earnings impact stock prices?

Because corporate earnings impact the companies overall value (they significantly impact stock prices)

Define Earnings per Share (EPS)

Measure of a company's profitability

Define Price to Earnings (P-E Ratio)

net income/number of outstanding shares

What does Beta measure?

systematic risk of investment

What is an Initial Public Offering (IPO)?

When a private company first sells shares of stock to the public

What are Secondary markets?

Secondary markets include the New York Stock Exchange (the Big Board), NASDAQ and AMEX.

What stocks can you purchase on the Secondary Market?

Common and preferred stocks of public companies (e.g., Apple, Tesla, Microsoft), ETF's, Corporate bonds, mutual funds, government securities

What is a ticker symbol?

Unique series of letters assigned to a publicly traded company's stock

What are the advantages and disadvantages of a Traditional “Full service” Broker?

Provides, investment expertise, advice, and services in exchange for commissions and fees. The cost is higher fees, which generally run from 1% to 2% of assets managed per year

What are the advantages and disadvantages of a Discount Broker?

you decide for yourself what your overall investment strategy should be, these types of brokerages sometimes offer free educational and research tools to help you with your investment decisions may charge fees, but they're usually lower than those of full-service brokerages

What is the Buy and Hold Technique?

Purchasing stock and hold onto it for many years, this helps it increase in value

What is Dollar Cost Averaging? What is the benefit of this strategy?

Purchasing an equal dollar amount of the same stock at equal intervals, helps to avoid buying high and selling low

What is Day Trading? Why is this considered similar to gambling?

buying a stock and then selling a stock in a short period of time, it can be close to gambling because you can always predict the market

What is the call feature?

feature allowing a corporation to call in, or buy outstanding bonds from current bondholders before the maturity date

What is face value?

dollar amount the bondholder will receive at the bonds maturity

Assuming an average yearly return of 4% on bonds, how long would it take for the investment to double in value (use Rule of 72)?

18 years

Define Mutual Fund

Pools investors money together and purchases a variety of securities, which can change

What types of underlying assets can a Mutual Fund hold?

Stocks, bonds, money market instruments, sometimes derivatives.

Define Actively Managed Mutual Fund

Mutual funds that is actively managed by a professional fund manager

Define Index Fund

An investment fund that aims to replicate the performance of a specific market index

Define Exchange-traded Fund (ETF)

A basket of investments made up of assets such as stocks or bonds, which allow you to invest in many securities all at once

What types of underlying assets can an ETF, an Actively Managed Mutual Fund and an Index Fund hold?

stocks, bonds, commodities, currencies, and derivatives

What is a Life-Cycle Fund (also called a Targeted Date Fund)?

type of mutual fund that automatically adjusts its asset allocation over time to become more conservative as the target retirement date approaches

Define Management Fee

Fee is a % of the asset value. Managed funds may charge 1.5% per year.

Define Front-end Load fee

Investors pay a commission (sales charge) every time they purchase shares. Average load charge is 3 to 5%

Define Back-end Load fee

Investors pay a commission (sales charge) every time they sell shares. Average load charge is 3 to 5%

Define Expense Ratio

Consists of the different management fees, 12b-1 fees (if any), and additional operating costs for a specific mutual fund (does not include Front or Back End Fees)

According to the Retirement Planning video in eLearn, when should you start saving for retirement and why?

Sooner you start more time you have to compounds

Social Security typically replaces what percent of the average worker’s preretirement earnings?

40%

What is an employer sponsored Defined Benefit Plan?

Employer pays a prior employee a set amount of money per month (a pension) when the individual retires.

What is an employer sponsored Defined-Contribution Plan?

Employer sponsored plan with an individual account for each plan participant

What are some examples of defined-contribution plans?

401(k) plan – for most employees, 403(b) plan – for education and some non-profit employees, 457 or TSP – for government employees

List some of the features of an IRA account.

tax advantages, investment flexibility, and potential for long-term growth, Many IRAs do not charge commissions or transfer fees.

What is the 4% Rule?

The first year, individuals can withdraw 4% of their total investment balance. In following year, they can withdraw the same 4% plus the inflation rate

List some key tips regarding Investing for Retirement.

1. start savings early, to give your money more time to compound, 2. contribute regularly, or as regularly as possible, if possible set up regular payments, 3. Max out your employers retirement plans 4. diversify your accounts as much as possible, 5. be aware of possible fees/be aware of inflation

What standard does a Financial Advisor operate under?

advisers need to place trades under a best execution standard

What standard does a Fiduciary operate under?

a fiduciary standard that is regulated by the Securities and Exchange Commission (SEC) or state securities regulators

Who needs a Last Will?

Anyone with assets should have a will, as well as anyone with children

What is a Living Will and why is it important to have one?

Provides for your wishes if you become physically or mentally disabled, it's important because it will help delegate your assets if your no longer able to do it

What is a Durable Power of Attorney?

also known as health care proxy, If you are unable to make decisions regarding your health care, this authorizes someone to do it for you

What is a Trust?

legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiaries

What is the benefit of having a Trust?

Trust remains private after death, unlike a will, reduces estate taxes, protects your assets