HDFS 238 Exam 2 | HDFS 238 - Personal Finance, Quizzes of Business Finance

Download HDFS 238 Exam 2 | HDFS 238 - Personal Finance and more Quizzes Business Finance in PDF only on Docsity! TERM 1 Investing (goals) DEFINITION 1 When you are far from your goal...be aggressive When you are close to your goal...be conservative TERM 2 Two ways to make money DEFINITION 2 Earn it Wages/income interest dividends capital gain Loan it Bonds TERM 3 "Loanership" DEFINITION 3 Invest by loaning money. An IOU. TERM 4 Bond DEFINITION 4 An interest-bearing certificate of long-term debt issued by corporations, the US government or municipalities You gain a profit from receiving interest payments or the return of principal upon maturity TERM 5 Issuer DEFINITION 5 The company/organization that borrows a bond TERM 6 Bondholder DEFINITION 6 The person who issues the bond, the lender TERM 7 Price of bonds DEFINITION 7 Par value or face value (it is not on sale) Discount (below face value) Premium (above face value) TERM 8 Interest DEFINITION 8 Coupon rate (bonds used to be issued in paper form) TERM 9 Investment DEFINITION 9 Principal (one of the ways to benefit from a bond is to get your bond returned back to you. This doesn't always happened.) Default rate TERM 10 Due date DEFINITION 10 Maturity date Before the due date: call option or callable bonds (many times they have to buy it back from you at premium, so you can make money) TERM 21 Phantom Interest DEFINITION 21 You will be taxed as if interest is coming in Interest accumulates with the bond itself Investor pays income tax on the interest that is "accumulating" Behaves like a series EE bond Parents often invest in zero-coupon for their children's education TERM 22 Municipal bonds DEFINITION 22 Munis don't pay federal tax (tax free or tax-exempt) Some money may not have to pay state tax (may live in state issued) Issued by local government (state, city) Proceeds finance public projects and ongoing expenses (good for individuals in a high marginal tax bracket) TERM 23 Corporate bonds DEFINITION 23 Money goes toward corporate expenses Pays both state and federal tax Default higher-varies with issuer Pay the highest interest rates TERM 24 Amount of Risk per Bond DEFINITION 24 Federal Treasury bonds have the least risk Municipal bonds are in the middle Corporate bonds have the highest risk TERM 25 Inverse relationship of price and yield DEFINITION 25 When market rates go down, the prices go up When market rates go up, the prices go down, your bond isn't worth as much any more. Say you have a $1,000 bond at 6% and the market rates go up so the coupon (interest) rate is 8%. Nobody wants your bond anymore. TERM 26 Why invest with bonds? DEFINITION 26 Reduced risk/protection preserve principal predictable income diversity/balanced portfolio May not be taxed at federal and/or state level Higher interest than CD's TERM 27 Mistakes with bonds DEFINITION 27 Too much invested in bonds at a young age Too much invested in bonds at an older age Little portfolio diversification Remember your GOALS TERM 28 What is saving? DEFINITION 28 Our short-term goals, our emergency funds TERM 29 What is investing? DEFINITION 29 How we can set our money aside so it can grow down the road TERM 30 Securities DEFINITION 30 The most common way people invest money TERM 31 Risk DEFINITION 31 How long do you plan on keeping your investments? How much money can you stand to loose? TERM 32 Risk tolerance DEFINITION 32 The ability to handle/deal with changes in the values of your investments TERM 33 Investment philosophy DEFINITION 33 Conservative (do you want to invest in bonds? More money market accounts? People ready for retirement should be conservative) Moderate (You are okay with small and steady growth, looking toward retirement) Aggressive (Goes all out, maybe interested in up and coming companies) TERM 34 Active investing DEFINITION 34 Carefully studies the economy, market trends, investment alternatives regularly monitors makes decisions to buy/sell with or without a professional TERM 35 Passive investing DEFINITION 35 Does not actively engage in trading, seeks to match returns TERM 46 Dividends DEFINITION 46 When companies are profitable, they distribute some of those earnings to shareholders in the form of cash or the chance to reinvest to purchase more shares in the company. TERM 47 Capital gains DEFINITION 47 When a stock price goes higher than what you paid to buy it, you can sell your shares at a profit. TERM 48 Capital losses DEFINITION 48 When a stock price goes lower than what you paid to buy it, you can loose money when you well a stock. TERM 49 Bull Market DEFINITION 49 When securities prices RISE twenty percent or more over time TERM 50 Bear Market DEFINITION 50 When prices have declined in value by twenty percent or more from previous highs over the course of several weeks or months TERM 51 Major US Exchanges DEFINITION 51 NYSE (The New York Stock Exchange), very credible, auction based American Stock Exchange, smaller, auction based NASDAQ, the first electronic exchange, a lot of companies are a part of it but it has less strict requirements in order to be a part of it TERM 52 Indexes DEFINITION 52 Monitors what is happening. Show trends Economy Examples DJIA (Dow Jones Industrial Average), S&P, NASDAQ, Russel 3000, Wilshire 5000, NIKKEI Each index measures things differently, so one day the Dow Jones could close up and the NASDAQ could close down. TERM 53 DJIA DEFINITION 53 Dow Jones Industrial Average Tracks 30 of the most influential companies in the NYSE that represent a quarter of the market. It is price weighted Points represent how many dollars the stock went up. TERM 54 S&P DEFINITION 54 The most frequently used index by financial people. Represents 70% of the market that is out there Made up of 500 companies TERM 55 NASDAQ DEFINITION 55 Looks at 5,000 companies, most are technology companies, smaller companies Not designed to represent the entire stock market. TERM 56 Russell 3000 DEFINITION 56 This index represents 98% of the stock market. TERM 57 Wilshire 5000 DEFINITION 57 A market-capitalization-weighted index of the market value of all stocks actively traded in the United States. TERM 58 NIKKEI DEFINITION 58 Represents the Tokyo stock market TERM 59 Price/earnings ratio DEFINITION 59 Current market price of a stock, earnings per share TERM 60 p/e ratios DEFINITION 60 low p/e ratios tend to have a higher dividend yields, less risk, lower prices and lower growth a successful company could have a p/e ratio of 7 to 10 a growing company could have a p/e ratio of 11 to twenty typical p/e ratios range from 5 to twenty-five (average is twelve) TERM 71 Large cap stocks DEFINITION 71 Stock of a large-size company (market capitalization of $10 billion or more) price of a large-cap stock is usually higher (lower risk) large-caps usually pay dividends and don't always have the potential for growth TERM 72 Speculative stocks DEFINITION 72 Potential for earnings sometime in the future stocks that have a level of uncertainty (spotty record or new stocks) accept some risk with this type of stock Ex: penny stocks that sell for less than $1.00/share volatility is high Beta value typically exceeds two.zero TERM 73 Tech stocks DEFINITION 73 Stocks in the technology sector Often technology based products TERM 74 Blue chip stocks DEFINITION 74 Well-established, usually large companies that have a long history of earnings, growth and dividends payments generally carry less risk than the stocks of smaller companies carry less risk than the stocks of smaller companies It's good to have a blue chip when you are playing poker! TERM 75 What happens when a stock splits? DEFINITION 75 No change in the $$ to the shareholder No change in $$ to the company However, there is a change in the number and price of shares For example, let's say there is a two for one split. If you had 100 shares at $50 each totaling $5,000, and the stock split you would have two hundred shares at twenty-five dollars each. If the price raises you can sell two-hundred shares instead of 100 and make tons of money! TERM 76 Fundamental analysis DEFINITION 76 The way most people evaluate stocks Based on company future earnings...what is the real (intrinsic) value or price? TERM 77 Technical analysis DEFINITION 77 Based on the market and price: looks and charts price movement, supply and demand, trading volumes TERM 78 Earnings per share DEFINITION 78 Annual profit divided by the number of outstanding shares Indicates the income a company has available to pay dividends and reinvest earnings indicates the income a company has available to pay dividends and reinvest earnings measures profitability TERM 79 Cash dividends DEFINITION 79 Distribution made to Share holder Dividends per share, cash dividends/shareholder Dividend payout ratio, dividend per share/eps Dividend yield, cash dividend paid expressed as a % TERM 80 Book value DEFINITION 80 The net worth of a company Book value per share Book value/number of shares of common stock outstanding Price to book ratio, current stock price/book value TERM 81 Long selling technique DEFINITION 81 Buy low, sell high TERM 82 Short DEFINITION 82 Borrow shares sell the shares buy at a lower price repay the shares borrowed this could be more risky because you could constantly be owing those shares back TERM 83 Stock dangers DEFINITION 83 Know the situation of the company trust you gut read annual report for detailed information know the numbers! Understand beta value, p/e ratio No diversification is bad, unless you have a mutual fund package Money manager is you! TERM 84 Mutual Funds DEFINITION 84 Shared investment pooled funds invest in a diversified portfolio of stocks, bonds, money market instruments, and other securities and assets on of the biggest strengths of a mutual fund is the inherent diversification about 8,000 mutual funds in '10 TERM 85 The process (mutual fund) DEFINITION 85 Investors send money to a mutual fund company The company takes the money and buys diversified stocks (500) Elevator example: would you take the elevator with one cable or the elevator with 6 cables?N TERM 96 C shares DEFINITION 96 Level load Good for short term investor 1% charged to the account each year good for short term investor TERM 97 Automatic reinvestment DEFINITION 97 Dividend Reinvestment Program (D.R.I.P.) mutual funds allow investors to reinvest interest, dividends and capital gains An effect like compound interest TERM 98 Keep your money DEFINITION 98 Let your money work for you and keep as much of it as you can! Inflation: 3-6% Tax on Profits: 15% Money Manager Fee: two percent 12 (b) 1 Fee: 1% Load 5.75% Some people don't like mutual funds because of these fees TERM 99 Income Objectives DEFINITION 99 Invest in securities that pay regular income through their dividends Regular high dividends/income Money market funds (highly liquid, safe security, tax- exempt funds MM, government securities MM) TERM 100 Bond Funds DEFINITION 100 Fixed-income funds Higher income than MMF Many different types of bond funds TERM 101 Growth objective DEFINITION 101 Invest in securities that seek capital appreciation. Stock with above average growth potential-no or low dividends. These are funds that are growing. Low or no dividends. Theses are funds that are growing. TERM 102 Growth funds DEFINITION 102 Long-term capital appreciation TERM 103 Aggressive growth DEFINITION 103 Maximum capital gains expenses are high, dividends are low TERM 104 Value funds DEFINITION 104 "Sleepers" Less growth, decent dividends TERM 105 Sector Funds DEFINITION 105 Invests in a specific market sector example: energy, transportation TERM 106 Microcap funds DEFINITION 106 Invest in high risk small companies TERM 107 Global funds DEFINITION 107 Invest in companies listed on foreign exchanges and the U.S. TERM 108 International funds DEFINITION 108 Invest in ONLY foreign stocks TERM 109 Socially conscious funds DEFINITION 109 Invest in stocks that fit a social goal, green fields TERM 110 Vice funds DEFINITION 110 Invest in peoples "vices", things like cigarettes, alcohol, weapons TERM 121 Top 3 mutual fund mistakes DEFINITION 121 Invest in funds with high load, fees and expenses withdraw dividends instead of reinvesting trying to chase trends, performance and the "hot" funds TERM 122 Family of funds DEFINITION 122 Investment management company that offers a variety of funds with diverse investment philosophies and objectives there are more than 400 mutual fund families (American funds, Fidelity, JP Morgan, T. Row Price, Vanguard, Wells Fargo Advantage) TERM 123 Rating firms DEFINITION 123 Morningstar (has a matrix that breaks down the type of fund and the risk, comes out every other week) TERM 124 General info on mutual funds DEFINITION 124 Smart Money Barons (quarterly issue) Business Week & Money Management (annual issues) Mutual Fund Fact Book & Mutual Fund Source Book (annual, 10 year perspective, features about 3,000 of the 8,000 mutual funds out there) search engine finance page TERM 125 Making money in a falling market DEFINITION 125 Dollar cost averaging during a falling market purchase more shares when the price is down disciplines buying strategy works in a fluctuating, falling and rising market Adhere consistently to two principles: consistently invest an equal sum of money consistently invest at regular intervals TERM 126 Advantage of Dollar Cost Averaging DEFINITION 126 Reduces average cost of shares purchased over a long period of investing profits rise as prices rise provides investor discipline "It takes neither brilliance nor luck; just discipline" TERM 127 Open-ended Fund & Taxes DEFINITION 127 Money manager buys and sells within the fund at their direction Buy at 10, sell at 50 = $40 buy at 15, sell at 45 = $30 buy at twenty-five, sell at 15 = $10 $60 profit to pay tax on If you hold the investment for less than a year you will be taxed in your tax bracket. For long term capital gains, you will be taxed 15% TERM 128 Exchange Traded Funds DEFINITION 128 ETF Hybrid of stocks and mutual funds Over 800 listed on stock market Closed-end fund (companies are chosen, the fund is locked, no buying and selling) a group of passively managed securities (like an index fund) duplicate the performance of a market TERM 129 EFT advantages DEFINITION 129 Tax efficient (close ended) Low expense ratio (usually index fund) No minimum (purchases) Mix between stock & mutual fund TERM 130 EFT Disadvantages DEFINITION 130 Pay a broker (you can't just go online. You need a middle man and will pay a commission every time a stock is bought or sold) sold on the stock market, supply & demand Not good for dollar cost not good for consistent investing not good for reinvesting dividends TERM 131 EFT examples DEFINITION 131 Diamond (DIA) - Dow Jones Industrial SPDR (SPY) - S&P 500 Cubed (QQQQ)- Nasdaq 100 IJH = S&P Midcap, 400 of the 500 EFA-EAFE Index EPP-Pacific EWG-German Index TERM 132 How many mutual funds should you purchase? DEFINITION 132 You only have to purchase 3 to 4 funds in order to have an extremely diversified portfolio.