Fundamentals Flashcards

The majority of _________ ETFs "reset" everyday, which means they are made to accomplish their investment goal every day.

Answer: Leveraged

Leveraged ETFs (Exchange Traded Funds) are designed to amplify the returns of an underlying index, often by a multiple (e.g., 2x or 3x). These funds typically 'reset' their leverage daily, meaning they aim to achieve their stated investment goal over a single trading day. Due to this daily reset, their long-term performance can significantly diverge from the stated multiple of the underlying index.

If you purchase stock in a corporation...

Answer: You have equity in the business.

When you purchase stock in a corporation, you become a part-owner of that company. This ownership stake is referred to as equity. As a shareholder, you have certain rights, such as voting on company matters and potentially receiving dividends, but you are not lending money to the company or directly responsible for its debts.

If you purchase a corporate bond...

Answer: You gave the business a loan of money.

Purchasing a corporate bond means you are lending money to the corporation. In return for this loan, the company promises to pay you regular interest payments over a specified period and repay the principal amount at maturity. Bonds are debt instruments, making you a creditor rather than an owner of the company.

What kind of bond is the most secure?

Answer: US. Treasury bond

U.S. Treasury bonds are considered the most secure type of bond because they are backed by the full faith and credit of the United States government. This government guarantee makes them virtually free of default risk, meaning there is an extremely low probability that the government will fail to make its interest or principal payments. This makes them a benchmark for low-risk investments.

Which of the following best describes what a "junk bond" is?

Answer: A bond that rating agencies have deemed to be "below investment-grade"

A 'junk bond,' also known as a high-yield bond, is a bond that has been rated by credit rating agencies as 'below investment-grade.' This low rating indicates a higher risk of default compared to investment-grade bonds. To compensate investors for this increased risk, junk bonds typically offer significantly higher interest rates.

Which of the following entities offers protection against stock market losses?

Answer: None of the above

None of the listed entities protect investors against losses due to fluctuations in the stock market. The SEC regulates the securities markets, SIPC protects against brokerage firm failure (not market losses), and FINRA regulates broker-dealers. Investing in the stock market inherently carries risk, and the value of investments can go down as well as up.

What examples of ownership investments are the following:

Answer: Collectibles and real estate

Ownership investments involve directly owning an asset, which can appreciate in value over time. Stocks represent ownership in a company, while real estate and collectibles are tangible assets that investors own. These differ from debt investments (like bonds or CDs) where you lend money, or cash equivalents (like savings accounts) which are typically low-risk and low-return.