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33 Cards in this Set

  • Front
  • Back
Putting saved money to work so that it makes you even more money.
Assets suitable for investment, including stocks, bonds, and mutual funds.
Shares of ownership in a corporation.
Collection of investments assembled to meet your investment goals.
Savings is the accumulation of excess funds by intentionally spending less than you earn.
Investing is taking some of the money you are saving and putting it to work
so that it makes you even more money.
What dictates the investment strategies you follow and the investment alternative you choose.
Your goals and the time it will take to reach those goals
dictate the investment strategies you follow and the investment alternatives you choose.
What are the signs that you are ready to begin an investment program?
1.You live within your income.
2.You are able to save regularly.
3.You use credit wisely
4.You carry adequate insurance.
You live within your income.
If you fi nd yourself constantly running short of cash toward the end of the month or if you make only minimum payments on
your credit card balances, you need to institute budget controls so you can live within
your means.
You are able to save regularly.
A good fi nancial manager
forgoes some spending to save regularly to build an
emergency fund, acquire goods and services, and achieve other goals. You can’t invest unless you have some savings with which to begin.
You use credit wisely.
Pay off any high-interest debt. Pay
credit card bills in full each month. Have a maximum credit limit
suffi cient to meet personal fi nancial emergencies.
You carry adequate insurance.
Liability insurance protects
your assets and lifestyle in the event you experience a loss and/or are sued. Health insurance is a must. Term life insurance protects the lifestyle of dependents.
In the next fi ve years you can start achieving fi nancial success by doing the following related to investment fundamentals:
1. Sacrifi ce some income and put some cash into a
diversifi ed investment portfolio for the future.

2. Accept more risk when investing for the long term.

3. Invest regularly through your employer’s retirement

4. Invest no more than 5 or 10 percent of your portfolio
in any single company stock including that of your

5. Rebalance your portfolio at least once a year based
on your chosen asset allocation strategy.
People invest for four reasons:
■ To achieve fi nancial goals, such as taking a vacation, purchasing a new car, making a down payment on a home, fi nancing a child’s education, or starting a business
■ To gain wealth and a feeling of fi nancial security
■ To increase current income
■ To meet retirement income needs
You must save money to have it for investing.
1.Pay yourself first
2.Save—don’t spend—extra funds
3.Participate in your employer’s retirement plan.
4.Make saving automatic
5.Continue to make installment payments to yourself.
6.Break a habit.
7.Get a part-time job.
8.Scrimp for one month.
fi nancial risk
Possibility that an investment will fail to pay a return to the investor.
total return
Income an investment generates from current income and capital gains.
current income
Money received while you own an investment; usually received regularly as interest, rent, or dividends.
Charge for borrowing money; investors in bonds earn interest.
capital gain
Increase in the value of an initial investment (less costs) realized upon the sale of the investment.
capital loss
Decrease in paper value of an initial investment; only realized if sold.
For most people it is diffi cult to accumulate wealth by
saving out of earnings.
Most wealth comes from capital gains.
To create wealth
use your savings to invest in stocks, bonds, mutual funds, or real estate and/or start a business.
When people
invest their money, they take a fi nancial risk (also called business risk)
the possibility that the investment will fail to pay them any return to the investor. At the extremes, a
company could have a very good year earning a considerable profi t, or it could go bankrupt,
causing investors to lose all of their money.
A dividend
is a portion of a company’s earnings that the fi rm pays out to its shareholders.
For example, Nina Hernandez from Oneonta, New York, purchased 100 shares of H&M
stock at $45 per share ($4500) last year. The company paid dividends of $3 per share during
the year, so Nina received $300 in cash dividends as current income.
A capital gain
A capital gain occurs only when you actually sell the investment; it results from an
increase in the value of the initial investment.
capital gain calculated
It is calculated by subtracting the total amount
paid for the investment (including purchase transaction costs) from the
higher price at which it is sold (minus any sales transaction costs). For
example, if the price of H&M company stock rose to $52 during the year, Nina could sell it for a capital gain. If Nina paid a transaction cost
of $1 per share at both purchase and time of sale, her capital gain would
be $500 [($5200  $100)  ($4500  $100)].
Investments with
potential for high capital gains
often pay little current income
investments that pay substantial current income generally
have little or no potential for capital gains.
_______investors are usually willing to forgo current income in favor of possibly earning substantial
future capital gains.
Long-term investors
Explain how to get started as an investor.
Before investing, think about your goals, why you want to invest, and whether you are ready to invest. After you find the money to invest, contemplate the types of returns you might anticipate. Investors hope that their investments will earn them a positive total return, which is the income an investment generates from current income and capital gains.
Discover your own investment philosophy.
Achieving fi nancial success requires that you understand your investment philosophy and adhere to it when investing. An investment philosophy is one’s general approach to tolerance for
risk in investments, whether it is conservative, moderate, or aggressive, given the financial goals to be achieved. You also need
to know about investment risk and what to do about it.
Identify the kinds of investments that match your interests.
Before investing your money, you need to think about lending versus owning, short term versus long term, and how to select investments that are likely to provide your desired potential total return.