Untitled Flashcards Set

INVESTING

Investing:
Putting money into something (stocks, bonds, funds, etc.) to earn a profit over time.

Goal of investing:
Grow your money over time through profits, interest, or price increases.

Compounding:
Earning interest on both the original investment and on the interest already earned (interest on interest!).

Bond:
A loan you give to a company or government in exchange for regular interest payments and your money back later.

Stock:
A share of ownership in a company.

Two ways to make money with stock:

  • Selling the stock for a higher price than you bought it (capital gain)

  • Earning dividends (payments made to shareholders)

Two major stock exchanges in the US:

  • New York Stock Exchange (NYSE)

  • NASDAQ

Diversification:
Spreading your investments across different types of assets to reduce risk.

Three types of funds:

  • Mutual Funds

  • Index Funds

  • Exchange-Traded Funds (ETFs)

Why do funds reduce risk compared to individual stocks?
Because they spread money across many stocks/bonds instead of just one, lowering the impact if one company does badly.

Are any of the above three funds insured by the FDIC?
No. Investments like stocks and bonds are not FDIC-insured — only bank deposits are.

Stock market index:
A measurement that shows how a group of stocks is doing overall.

Four major stock market indexes:

  • S&P 500

  • Dow Jones Industrial Average (DJIA)

  • NASDAQ Composite

  • Russell 2000

Index funds:
A fund that copies a stock market index (like S&P 500) instead of trying to pick winning stocks.

Compare the level of risk:

  • FDIC-insured savings: Very low risk

  • Bonds: Moderate risk

  • Stocks: Higher risk

LAW OF DEMAND

General Definition of Demand:
How much of a good or service consumers are willing and able to buy at different prices.

Definition of Quantity Demanded (Qd):
The specific amount consumers want to buy at a certain price.

Law of Demand (memorize it!):
As the price of a good rises, the quantity demanded falls; as the price falls, the quantity demanded rises.

Focuses on:
Consumers

Slope of the Demand Curve:
Downward (from left to right)

Demand Elasticity:
How sensitive consumers are to price changes.

When consumers are less sensitive to price changes:

  • Needs (ex: insulin, gasoline in short term)

When consumers are more sensitive to price changes:

  • Luxuries (ex: vacation trips)

  • When there are many substitutes (ex: soda brands)

LAW OF SUPPLY

General Definition of Supply:
How much of a good or service producers are willing and able to sell at different prices.

Definition of Quantity Supplied (Qs):
The specific amount producers are willing to sell at a certain price.

Law of Supply (memorize it!):
As the price of a good rises, the quantity supplied rises; as the price falls, the quantity supplied falls.

Focuses on:
Producers

Slope of the Supply Curve:
Upward (from left to right)

When price rises and Qs increases, what happens to Qd?
Qd usually decreases.

When price falls and Qs decreases, what happens to Qd?
Qd usually increases.

Supply Elasticity:
How easily producers can change the amount they produce when prices change.

Situations where producers cannot respond quickly to price changes:

  • Farming (crops need time to grow)

  • Housing construction (takes months or years)

MARKET EQUILIBRIUM & PRICES

Market equilibrium (Equilibrium Point):
Where the quantity demanded equals quantity supplied.

Relationship between Qd and Qs at equilibrium:
Qd = Qs

Equilibrium Price (Ep) (Market-Clearing Price):
The price where Qd = Qs.

Equilibrium Quantity (Eq):
The amount of goods bought and sold at the equilibrium price.

Market price:
The current price a good or service is being sold at.

What pushes market price to the equilibrium point:
Competition among buyers and sellers.

Disequilibrium:
When Qd ≠ Qs — not at equilibrium.

Shortage:
When Qd > Qs (more people want it than producers can supply).

During a shortage:
Qd is greater than Qs.

Rational producer’s response to shortage:
Raise prices to balance supply and demand.

Surplus:
When Qs > Qd (more is produced than people want to buy).

During a surplus:
Qs is greater than Qd.

Rational producer’s response to surplus:
Lower prices to sell excess goods.