Why Invest?
What is Investing?
Buying assets, such as stocks, with the intention of holding them and growing wealth over time.
What does owning a stock represent?
Partial ownership of a company.
Why do companies sell stock to investors?
To raise capital/money for the business.
When you purchase a bond, are you buying ownership or lending money?
Lending money
What does diversification mean?
Spreading investments among different investments to reduce risk.
Michael starts investing at age 22. He invests $200 per month until age 62.
How much money did Michael personally contribute?
40 years × 12 months × $200
$96,000
What is a bond's maturity date? What should happen on the maturity date?
The date when the bond reaches the end of its term and the issuer is expected to return the bond's face value.
Why might someone invest rather than keep all of their money in a savings account.
Investing has the potential to earn higher returns and can help protect purchasing power from inflation.
What are the 2 primary ways an investor can make money from stocks?
Selling for a higher price (capital gains) and dividends.
What is a bull market?
A market that is generally rising.
Name the two typical types of issued bonds.
Government and Corporations
An investor owns stocks in technology, healthcare, energy, and consumer goods companies. What strategy is being used?
Diversification
Emily starts investing at age 30. She invests $400 per month until age 65. Her average annual return is 7%.
How much did Emily personally contribute?
35 × 12 × $400
$168,000
What happens to a bond's terms if its market price changes while you continue holding it until maturity?
The market price change does not change the bond's promised terms. If held to maturity, the investor continues to receive the promised interest and face value, assuming the issuer does not default.
What is compound growth?
Earning a percentage on top of percentages no your investments.
A student buys a stock for $40 per share and later sells it for $55 per share. What type of investment return did the student receive?
Capital gain of $15 per share.
What is a bear market?
A market that is generally declining.
What does an investor generally receive from a bond?
Interest payments and the bond's face value when it reaches maturity.
What is dollar-cost averaging?
Consistently investing small amounts of money over time rather than trying to invest everything at one time.
Jasmine starts investing at age 25. She invests $300 per month until age 65. Her average annual return is 8%.
Approximately how much will she have in her IRA at age 65?
Approximately $1,047,302.35
What is a bond fund?
A fund containing a diversified pool of bonds.
Why does starting to invest earlier generally give an investor an advantage?
The investor has more time for their money to compound and grow.
A company pays part of its profits to its shareholders. What is this payment called?
A dividend
Why is trying to perfectly time the stock market extremely difficult?
It is difficult to predict when the market will rise or fall. Market trends are easier to identify after they have happened.
What is default risk?
The risk that the bond issuer cannot make the promised payments.
Why might an investor want to hold investments for at least five years?
A longer time period can help reduce the impact of short-term market fluctuations and reduce the temptation to sell during a temporary decline.
Carlos starts investing at age 18. He invests $150 per month until age 60. His average annual return is 9%.
How much did Carlos personally contribute, and approximately how much would he have in his IRA?
42 × 12 × $150 = $75,600
Approximately $870,262.01
An investor owns only one company's stock. Another investor owns stocks from 30 different companies across several industries. Which investor is more diversified?
The investor with 30 different companies across several industries.
True or False: Investing is attractive because it guarantees a consistent rate of return with less risk than a savings account.
False. Investing does not guarantee a consistent return.
An investor owns 100 shares of a company. The company announces a 2-for-1 stock split. How many shares will the investor own after the split?
200 shares
An investor sees these choices on a stock quote: stock price, dividend, P/E ratio, and market capitalization. Which measurement represents the total value of the company?
Market capitalization (market cap).
You own a bond paying 5% interest. New bonds are now paying 7%. What generally happens to the market value of your existing 5% bond?
Its market price generally decreases because newer bonds offer a higher interest rate.
Which is NOT one of the risk-management strategies emphasized in the lesson?
A. Time
B. Diversification
C. Investing over time
D. Hiring a manager who promises to beat the market
D.
Sophia starts investing at age 27. She invests $350 per month until age 67. Her average annual return is 9%.
How much did Sophia personally contribute?
How much would she have approximately in her IRA?
40 × 12 × $350 = $168,000
Approximately $1,638,462.10
Put these ideas together: starting early, investing consistently, diversification, and holding investments for the long term.
What overall investing principle do these ideas demonstrate?
Successful long-term investing involves time, consistency, diversification, and allowing investments to grow rather than trying to constantly predict or time the market.