Personal Fianace Test 1

interest rates, stock market..

What is the difference between a Checking and Savings account

Savings has higher interest

Savings has a transaction limit

What should you be weary of in a bank account

FEES

transaction fees and inactivity fees

Where are transaction fees going to occur

Savings accounts

What are the cons of using an online bank

there is no physical location, limited ways to cash deposit and only a call center

What is the tradeoff for the cons of an online bank

Higher interest rates

What is inflation

a general increase in prices and fall in the purchasing value of money

What does the federal reserve do

• has a massive impact on interest rates

• They have long term price stability

  • Aim for 2% inflation over time

    • This maximises employment and price stability

What is the average return on the stock market

12.23%

What is the Compound annual growth rate (CAGR) for stocks

10.30%

What is better average return or CAGR

CAGR

What is a CD- Certificates of deposit

Give money to the bank to hold for a period of time to get higher interest then a checking or savings account

What is the trade-off for a CD

Dont have immediate access but recieve a guaranteed rate of return

Do CD Rates change?

They can after you get your money back, but the rate is the same while they hold your money.

compound interest??

You receive interest on top of previous interest.

What is the interest rate (simple)

the earnigns you will get on your balance throuout the year without compounding

what is APY

interest rate equivalent if you include compounding throughout the year

how should you use your bank accounts

Income goes into the checking account, pays your bills, adds to retirement accounts, and then is deposited into a savings account. Leave some in the checking account.

What is the benifits of splitting you money into accounts

• organization

• Smaller chance of losing everything to fraud

What is a stock

Shares of a stock represent ownership ina company

What is a Market cap?

total value of a company (total outstanding shares x price of one share)

What is a stock ticker

Short-Hand naming system for stocks, mutual funds, and more

What is Stock ticker symbol

Ususally 1-4 letters long

What is a mutual fund ticker symbol

5 letters long

Does stock price show company value

NO - Just because a stock’s price is small or large does not inherently mean its total value is small or large

what is a mutual fund

an investment program funded by shareholders that trades in diversified holdings and is professionall managed

How many stocks in a mutual fund

can be only a few or thousands - depends on the fund

how to mutual funds make money

Asset management fees, loads, and 12b-1 fees

What is an asset management fee

Charged daily (trading days)(for mutual funds/ETFs)

Fee is stated as an annual number

What is a load on a mutual fund

Essentially a large commission when they buy, sell, or a combination of both

can eb voer 5%

What is an 12b-1 fee

Ongoing commission to the advisor and/or marketing fees

What is a stock market index

measures the preformance of a collection of stocks

What are the big stock market indexes

S&P 500, Dow Jones industrial average, Nasdaq composite, russell 2000

What is the difference between the S%P 500 and the Dow jones index

S&P 500- market cap weighted

Dow Jones- stock price weighted

Can you invest in an index?

Technicallly no, you can invest in a mutual fund or ETF that tracks the index

What is up with the stock market being at 10%

There are very few years that the market is at 10%, usually above.

What is an active fund management

trying to pick the best securities within an index so as to outperform it

• Most are mutual funds, but some are ETFs

What is a passive fund managment

Instead of trying to pick the best securities within an index to outperform it, they invest in every security in the index

If a mutual fund has an index in the name or references a popular index- what kind of fund is it

passive

Do people usually beat the index with an active fund

no most do not

What do ETFs entail

- Traded on the exchanges during the day, (mutual funds are traded at the end of the day)

- Typically, track indexes (called passive)

• Many mutual funds are active.

- No loads or 12b-1 fees

Art ETFS active or passively managed

passively

Differencees with ETFs and Mutual funds

• ETFS often have lower expense ratios

• Mutual funds have higher tax implications due to capital gains

• Mutual funds traded at the end of day

• ETFS traded anytime during the day

Similaries with Mutual Funds and ETFs

• Pool together the money of investors

• Basket line investments that can hold hundreds or thousands of seurities

• can be either equity, fixed income, or balanced funds

• charge fees

what is the naming mechanism for Mutual funds

5 letters, always ends in x

What is the naming mechanism for an ETF

typically 3-4 letters

What is a total return

assuemes dividends are reinvested

what is a price return

does not include dividends

Dividend review

Comapny stock price $100 and dividend is $2

• after dividends the stock price is $98 and cash in had is $2

• so they take money from their stocks to give back in dividends

What is special about bonds

There is less risk so there is less reward

How to bonds work

You give money to a company, and how ever meny years your term is they give you back a percentage of your money each year. At the end they give you back your inital payment

Why does a company take on debt?

The company thinks it can make more than the interest rate its paying

what to know about bonds

• considered less risky than stocks

  • but this means there is less reward

• Bonds also tend to move inverslt to stock during economic downturns (BUT NOT ALWAYS)

What is a risk with bonds

• The riskier (less financially secure) the company issuing the bond, the higher the interest rate will likely be

  • because there is no guarantee they will pay you back

What are target Date funds

-               Commonly found in retirement plans

-               Increase the allocation to bonds over time.

-               Happens automatically.

When to pick the best target date fund

• Select the fund based on your target retirement date

Should you invest in bonds as a young person?

NOT REALLY- and not for retirement purposes, it is better to invest in stock becuase if you lose money you have more time to make it back

over a 20 year period, how often are your stock annualized returns positive

100%- NEVER NEGATIVE AT 20 YEARS