(Investor's Knowledge) Flashcards

What is the definition of "false diversification"?

Answer: Owning a lot of investment that all move up and down together

You aren't genuinely diversified if you own 20 different stocks, all of which are in the IT business. If the tech industry suffers a setback, your entire portfolio will be wiped out.

What exactly does it mean to be diversified?

Answer: Owning investment that react differently to market or economic events

Diversification is the process of dividing your money over a variety of investments that will perform differently in the same situation. Bonds, for example, usually rise when stock prices fall. You can lessen the volatility of your portfolio by holding both stocks and bonds.

A key difference between ETFs and mutual funds is which of the following?

Answer: ETFs trade through the trading day while mutual funds trade once per day

ETFs, like stocks, can be purchased and traded at any time during the day. This means that an ETF's price will fluctuate from time to time. A mutual fund, on the other hand, is only priced once a day, at the end of the trading day. Active or passive management is available for both ETFs and manual funds.

What do you get when you buy a mutual fund share?

Answer: An ownership stake in the mutual fund company

You own a share of a mutual fund that invests in Apple and Google; you don't actually own Apple and Google (unless you buy them yourself elsewhere). Unfortunately, you'll have to pay for your own ice cream cone as well. If you're investing, on the other hand, you've earned it.

What is the difference between a Roth and a conventional?

Answer: Roth contributions are after-tax, while traditional retirement contribution are pre-tax

You won't be able to deduct money deposited into a Roth today, but you will be able to withdraw it tax-free later. This implies that your Roth earnings are never taxed (as long as you follow the IRS's withdrawal criteria). Traditional and Roth IRAs and 401(k)s are both available.

What exactly is a basis point?

Answer: A measure used to express differences in interest rates is equal to 0.01%.

A basis point is a unit of measurement for interest rate adjustments. One basis point equals 0.01 percent (0.0001), therefore if rates jumped 50 basis points, that means they rose 0.5 percent

What is a mutual fund's sales load?

Answer: A commission paid by the investor when buying or selling the fund.

A commission paid to the broker who sells you a mutual fund is known as a "sales load." On top of the expense ratio, the sales load is deducted from your investment dollars, which is why investors should look for no-load mutual funds.

If bonds and interest rates were on a playground together, they'd be on the:

Answer: Seesaw

When interest rates rise, bond prices often decline, much like a seesaw (and vice versa). This is due to the fact that investors aren't as eager to pay as much for old bonds with lower interest rates as they are for new bonds with greater interest rates.

What does "shorting" a stock imply?

Answer: To sell stock you don't own

Shorting a stock, often known as short selling, is the act of selling borrowed stock. Short sellers do this in the hopes that the stock price will fall, allowing them to purchase it at a reduced price later. If the price rises, the seller is liable for purchasing at the new price, effectively doubling the risk of loss.

If you purchase stock in a corporation...

Answer: You own a part of the company

The reason why shares of stock are referred to as "equities" is because they each represent a small portion of a company's ownership and often give the holder the right to cast a vote in the election of directors as well as other issues at shareholder meetings or by proxy.

To purchase a company's bond...

Answer: You have lent money to the company

Bonds are loans made by investors to businesses or governmental entities in exchange for periodical interest payments and the eventual return of the principal. To raise funds for operations, acquisitions, and capital investments, businesses issue corporate bonds. Bondholders, however, do not have ownership rights in the company like stocks do.

In general, riskier investments typically yield higher returns over time than less risky ones.

Answer: True

Long-term, the stock and bond markets frequently reward taking risks. The risk-reward tradeoff is what we refer to as. High-risk investments like small-company stocks, however, can be very volatile in the near run. You may want to place more emphasis on investments that offer a consistent return with less volatility, such short-term bonds, the less ready you are to take that risk.

Which of the following securities has the greatest chance of practically losing all of its value in the event that a company declares bankruptcy?

Answer: The company's common stock

Shareholders of common stock have the last claim among those with claims to the assets of a bankrupt corporation, coming after secured creditors, bondholders, and holders of preference shares. If the claims of the secured and unsecured creditors are not fully satisfied, common shareholders may not receive anything.

Which of the following best describes why a majority of municipal bonds have yields that are lower than those of other treasuries?

Answer: Municipal bonds can be tax-free

Even though municipal bonds have lower yields than other government bonds, investors in higher tax brackets are drawn to them because municipal bond dividend payments are often free from federal income tax.

You put $500 down to purchase stock on margin for $1,000. The stock's value decreases by 50%. You market it. How much of the $500 you initially invested are you ultimately left with?

Answer: $0

You run the danger of losing all you invested, if not much more, when you buy stocks on margin. In the above example, a stock transaction costing $1,000 was made by an investor using $500 of his own money and $500 borrowed from a brokerage company. The investor still owed the brokerage company for the margin loan when the stock was sold after losing 50% of its value. The stock's remaining value was $500.

Which definition of "selling short" is the best?

Answer: Selling borrowed shares of a stock

Short selling is borrowing stock from a broker via a margin account, selling it, and then buying it again and giving it back to the broker. Since the value of the stock borrowed and sold would be higher than the value of the shares subsequently purchased and returned to the broker, the investor will profit if the stock declines in value, as the short seller anticipates. To make up for the stock due to the broker, the investor must pay the difference if the stock's value increases.