07 Investing Basics Free Online FlashCards

What is an investing time horizon?

A time horizon is how long you expect to invest before using the money. Money needed soon generally belongs in safer, more accessible savings.

Does higher investment risk guarantee higher returns?

Higher potential returns generally involve greater risk, but taking more risk does not guarantee a higher return.

What are three possible sources of investment returns?

Returns may come from price appreciation, interest, or dividends.

What is investment compounding?

Compounding occurs when invested earnings remain invested and can themselves earn returns. It may support long-term growth, but cannot ensure a profit.

What does diversification do—and not do?

Diversification spreads investments across and within categories to reduce the impact of any one company, industry, or asset class. It cannot eliminate market risk or guarantee against losses.

What is asset allocation?

Asset allocation is how investments are divided among broad categories, often stocks, bonds, and cash or cash-like holdings.

What does owning a stock represent?

Stocks represent ownership in a company. Investors may benefit from a rising share price or dividends, but prices can fall sharply and a company can fail.

What is a bond?

A bond is a loan to a government or company. The issuer generally promises interest payments and repayment of principal, but may fail to pay.

How do mutual fund and ETF trading times differ?

Mutual funds generally transact at a price calculated once each business day; ETF shares trade on an exchange during the day.

What does an index fund aim to do?

Index funds aim to track a market index and hold a basket of securities. They still carry the risks of those holdings, and fees reduce investors’ returns.

What is an important limitation of cash equivalents?

Cash equivalents are generally more stable and accessible than stocks, but their returns may not keep pace with inflation. Money market funds are investments, not FDIC-insured bank deposits.

Is a retirement account itself an investment?

A retirement account is an account type, not an investment. Money inside it must still be invested or held in cash.