Investing Fundamentals
Unlike saving, which is best for short-term goals or emergencies, this financial strategy allows you to accumulate long-term wealth for retirement.
What is Investing?
Unlike a bond, which represents a loan to an organization, buying a stock gives the investor this in a company.
What is partial ownership?
This government-managed program pools worker tax contributions to provide baseline retirement income benefits to eligible individuals.
What is Social Security?
These popular investment funds track broad stock indexes like the S&P 500 to deliver low-cost, market-matching returns.
What are Index Funds?
This financial process allows an investor to earn returns not only on their initial principal, but also on accumulated interest from prior periods.
What is compound interest?
The core relationship between risk and return states that investors expecting higher returns must take on this level of risk.
What is higher risk?
Stockholders can earn money through capital gains when selling at a higher price or through these periodic corporate earnings distributions.
What are dividends?
If an employer offers a matching contribution on a 401(k), employees should prioritize contributing enough to receive this matching maximum.
What is free money / the full employer match?
Unlike passive index funds, this type of mutual fund relies on a fund manager who picks holdings and charges higher operational fees.
What is an actively managed fund?
Exiting the stock market during a downturn out of fear is an emotional behavior that prevents people from making this kind of investment decision.
What are smart / rational investment decisions?
Spreading investments across various asset types is recommended primarily because it achieves this risk-management outcome.
What is reducing overall risk?
As a shareholder in a public company, you possess partial ownership and may receive these periodic payout payments if offered.
What are dividends?
When deciding between opening a Roth IRA and a Traditional IRA, an investor must ask whether they prefer to pay income taxes now or at this point.
What is later / in retirement?
A main characteristic of Exchange-Traded Funds (ETFs) compared to standard mutual funds is that ETF prices fluctuate and trade continuously during this window.
What is throughout regular trading market hours?
If your bank account earns 0.5% interest while inflation sits at historical averages around 2-3%, this happens to your purchasing power over time.
What is a decrease?
Before building a portfolio, investors must assess this personal measure to ensure their investments assume a level of risk they are comfortable with.
What is risk tolerance?
This specific type of financial account must be opened to buy and sell individual stocks, bonds, and mutual funds.
What is a brokerage account?
This investment vehicle automatically shifts its asset allocation from aggressive to conservative as you approach a specific retirement year.
What is a Target Date Fund (TDF)?
Purchasing an individual bond is considered less effective at achieving this compared to purchasing a bond fund.
What is diversification?
Beginner investors are advised against selecting individual stocks in an effort to accomplish this risky market outcome.
What is beating the market?
This investment strategy involves continuously buying fixed dollar amounts of an asset at regular intervals to lower overall risk.
What is dollar-cost averaging?
You purchase 10 shares of stock at $45 per share and sell them two months later at $80 per share. Assuming no fees, this is your net profit.
What is $350? (10 shares $\times$ $80 = $800 proceeds; 10 shares $\times$ $45 = $450 cost; $800 - $450 = $350 profit)
A key trade-off of using automated robo-advisors instead of traditional wealth managers is the potential inability to receive guidance from one of these.
What is a human financial advisor?
ActiveFund20 has a 7.0% gross return with a 1.0% fee. PassiveFund500 has a 6.5% gross return with a 0.1% fee. This fund generates the higher net return.
What is PassiveFund500? (6.4% net return vs 6.0% net return)
If you buy a bond with a fixed 5% rate, and newly issued bond rates drop to 3% a year later, the market price of your bond will do this.
What is increase?