Investing Test Flashcards

What are the 3 things to know about a bond?

• Coupon

• Maturity date

• Credit quality

What is diversification?

Building a portfolio of different stocks in different industries

What is asset allocation?

Having different categories: stocks, bonds, commodities

What is a dividend?

Profit shared with investors as a reward for holding stock

What are 2 options that investors have with dividends?

Reinvest them in order to earn compound interest

Take it in cash (supplementing fixed income)

Why are ETF’s more liquid than mutual funds?

ETF’s are open throughout the day (open between 9:30am and 4pm)

What is one characteristic of an ETF?

Performs like a stock

What are the three types of valuations for stocks?

Price to Earnings (PE Ratio)

Price to book

Price to sales

What is the formula for Price to Earnings?

Profits/Shares = EPS

EPS/Price = PE Ratio

What does due diligence mean?

Research

What makes Price to sales more risky than PE Ratio?

We can’t tell if companies are profitable by using price to sales, it’s less clear

(Income statement of the bank)

IPO’s are…

DANGEROUS

What is the formula for Price to Book?

Assets minus Liabilities (uses the balance sheet)

Where are IPO’s created?

In the primary market, then they go to trade in the secondary market

What is a prospectus?

A legal document that every IPO needs to have; tells us why they are raising the money

What is the shortest US Treasury Bond?

Treasury Bill

What is the longest US Treasury Bond?

Treasury Bond with a 10-30 year maturity

Which US Treasury Bond sits in between the middle of the two?

Treasury Notes, they take 2-10 years to mature

Why would an investor purchase individual stock?

In order to increase earnings

What does an upward sloping on the graph represent?

Short duration assets yield less than long duration assets (normal)

What does an inverted yield curve represent?

Economic recession

What does a flat yield curve represent?

Uncertainty in the economy

When is the only time we can use the word “safe” when it comes to investing?

U.S. Treasuries

What is duration risk?

Locking up your money for a long period of time

What is single stock risk?

Placing all of your money into one single stock

What is the highest credit quality a bond can achieve?

AAA

What is a junk bond?

Below investment quality bond

What happens as you go down the credit quality spectrum?

As you go down the credit quality spectrum, the interest rates go UP

If you purchase a call option, what do you expect the stock to do?

Go up

If you purchase a put option, what do you expect the stock to do?

Go down

What is time decay?

The longer you own an option, the less value it will have

What do you need in order to trade options?

Margin account

What is options hedging?

•  Protecting your portfolio by buying put (go down) options on every single stock you own

• Or buy put options on the S & P 500 Index (Much easier) 

What type of strategy is selling covered calls?

Income generating strategy

What is preferred stock?

Bond proxies that pay really good dividends

• No voting rights

• No growth

• Callable by the owner

True or false: Preferred stocks are callable by the owner

True

What are some characteristics of ETF’s?

• Tax efficient

• Instant diversification

• Solid growth

What is one con about ETF’s?

You will NEVER get outperform the market

Why are fruits and vegetables not considered commodities?

Fruits and vegetables are not considered commodities because they cannot be stored for long periods of time; they’re perishable

What is Dollar Cost averaging?

Investing the same amount of money at regular intervals 

What is another word for bond?

Debt

What does “principal” mean?

Initial invested amount of capital in a bond

What is a market order?

An order to buy or sell a stock at the current market price.

How can we protect ourselves in the market when buying stocks?

Limit order or stop loss order as well

What is common stock?

The most predominant stock, it is purchased for growth and income

Blue Chip Stocks

Shares of large, well-established, and financially sound companies that have a history of reliable performance, often paying dividends.

What type of people are mutual funds designed for?

Those who do not have have the time, desire, inclination, or the interest

What is Active investing?

Buying and selling stocks more frequently

What is passive investing?

Index investing into ETFs such as S & P 500, QQQ (NASDAQ) , DIA (Dow Jones Industrial Average)

What is the United States Treasury Department?

Fiscal agent (they manage the finances of the federal government) for the U.S. Government) 

IRS collectors taxes, enforce tax policy

U.S. Mint: Produce coin and currency 

Manages Federal Deficit 

Manages fiscal policy

What is the Federal Reserve?

(Central bank of the United States) created by an act of Congress, they are in charge of the health of the banking sector

Is it true that the Federal Reserve conducts monetary policy?

Yes, it is true