Investment Starting Investment 2 — Questions and Answers
Question 1: What is typically the first step before making any investment?
- Building an emergency fund (Correct answer)
- Buying individual stocks
- Day trading
- Taking out a loan to invest
Correct answer: Building an emergency fund
An emergency fund covering 3-6 months of expenses protects you from selling investments at a loss during a crisis.
Question 2: Which account offers tax-advantaged retirement savings in the U.S.?
- Checking account
- Roth IRA (Correct answer)
- Money market savings
- Certificate of deposit
Correct answer: Roth IRA
A Roth IRA allows after-tax contributions to grow tax-free, making it a popular retirement vehicle.
Question 3: What does 'dollar-cost averaging' mean?
- Investing a lump sum all at once
- Investing fixed amounts at regular intervals (Correct answer)
- Only buying when prices drop
- Converting dollars to other currencies
Correct answer: Investing fixed amounts at regular intervals
Dollar-cost averaging invests a fixed amount regularly, reducing the impact of market volatility.
Question 4: Why is starting to invest early beneficial?
- Stocks are cheaper when you're young
- Compound growth has more time to work (Correct answer)
- Taxes are lower for young investors
- Brokers charge less for beginners
Correct answer: Compound growth has more time to work
Starting early gives compound returns more time to multiply your wealth.
Question 5: What is a low-cost way for beginners to diversify?
- Buying one company's stock
- Investing in an index fund or ETF (Correct answer)
- Putting all money in crypto
- Holding only cash
Correct answer: Investing in an index fund or ETF
Index funds and ETFs hold many securities, giving instant diversification at low cost.
Question 6: What is an employer 401(k) match?
- A penalty for early withdrawal
- Free money the employer contributes based on your savings (Correct answer)
- A type of stock option only
- A government tax credit
Correct answer: Free money the employer contributes based on your savings
An employer match adds free money to your retirement account, so contributing enough to get the full match is wise.
Question 7: Before investing, why should you pay off high-interest debt first?
- Debt has no effect on investing
- The guaranteed savings often exceed expected investment returns (Correct answer)
- Investing is illegal with debt
- Brokers require zero debt
Correct answer: The guaranteed savings often exceed expected investment returns
Paying off high-interest debt like credit cards offers a guaranteed return that usually beats market gains.
Investment Starting Investment 2
What is typically the first step before making any investment?