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Intro to Investing
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Terms in this set (32)
What is investing?
Purchasing assets to increase its future value
What is the formula to calculate the rate of return?
The amount you made/the amount you invested
Risk
The uncertainty of a future event
Investment Risk
The investment will lose money
Inflation
The general rise in prices
Inflation risk
The value of money may be worth less in the future
Stock
A share of ownership in a company
Dividend
Profit from the company given to the stockholders when it makes money. It is usually used to buy more stock.
Bond
A form of lending to companies or government agencies (schools, city, state).
Mutual Fund
When stocks from many companies are rolled into one fund.
Index Fund
When stocks from many similar companies are rolled into one fund.
Real Estate
Buying buildings and land
Speculative Investment
A high risk high return investment
Conservative Risk Tolerance
You don't like to risk your money, so you just keep it in the bank where it earns just a little interest and very safe.
Moderate Risk Tolerance
You invest in mutual funds and stocks with proven results.
Aggressive Risk Tolerance
You day trade, you buy stock in small companies you think will be the next Amazon, Walmart, Microsoft and etc. You look to hit it big and sell and move on to another investment.
Portfolio Diversification
When you have a mixture of aggressive, moderate, and conservative investments.
Brokerage Firm
Someone that helps you invest your money
Rule of 72
Calculates how long an investment will take to double or the interest rate to double the investment.
Example of Inflation
Pop was 20 cents a bottle 40 years ago and now its $2.
Example of Inflation Risk
If I buried $100 in my back yard and didn't dig it up for 20 years there is a good chance it won't buy as much stuff as it did 20 years ago.
Walmart
An example of a stock
Mutual Fund Advantages
Spreads out the risk and lets you invest in lots of stocks
Mutual Fund Disadvantage
Get charged a fee to by the fund manager
Index Fund Advantage
Let you buy stocks in one fund that targets one industry
Real Estate Investment Example
Buying land near a shopping center or fixing up a house and selling it for a profit
Formula on how long it takes your money to double
72/Interest Rate = Years to double
Formula needed to calculate the interest rate needed to double the investment.
72/Years of Investment = Interest rate needed
Sally has $4,000 in a Certificate of Deposit earning 8% interest. How long will it take to double her investment?
72/8 = 9 years
Mark has 7,000 to invest in a truck when he completes college in 6 years. What interest rate is required for him to double his investment?
72/ 6 years = 12 %
Calculate the rate of return on the following. Bill saved $400 in a money market. After one year he had a return of $200. What was Bill's rate of return?
$200/$400= .5 or 50% Rate of Return
John invested $800. When he withdrew the money, he had $1,050. What was his rate of return?
$250/$800= .3125 or 31.25% Rate of Return
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