Investing Test Review

How is a bond different from a stock?

• Bonds are usually issued by smaller startup companies while stocks are issued by well established organizations

• A bond is a loan you give to an organization while a stock is partial ownership in a company

• Bonds are typically riskier than stocks but have the potential to earn higher returns

• Bonds are best for earning high returns while stocks are best for providing a stable source of income

Why is it important for you to understand your risk tolerance before you start investing?

• You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with

• It helps you decide if you want to participate in your employer’s match program for your 401(k)

• If you have a high risk tolerance, you may be eligible for lower fees since you won’t care if your portfolio drastically loses value

• It’s recommended that people with a low risk tolerance shouldn’t invest at all

Over time, the stock market has…

• Gone through severe ups and downs with an overall decrease in value

• Had slight ups and downs but stayed about the same in value

• Rarely experienced changes and has maintained the exact same value

• Experienced highs and lows but increased in overall value

How does investing in the stock market differ from putting money in a savings account at a bank?

• Investing is best for short-term situations like emergency funds; saving is best for the long-term

• Investing is always a less risky option than saving

• Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies

• Investing typically earns between 1-2% while saving generally earns between 5-7%

What kinds of behaviors can PREVENT people from making smart investing decisions? 

• Buying stocks when prices are low and selling them when they’re high

• Staying calm when the market is experiencing a downturn

• Exiting the market because that’s what everyone else is doing

• Investing in a diversified portfolio instead of trying to beat the market

Why is this likely a bad investment strategy to invest all your money in individual stocks?

• Purchasing individual stocks has a high amount of risk and little diversification.

• You will need a large amount of money to invest in individual stocks.

• You will need to open multiple brokerage accounts for each stock you purchases.

• Purchasing individual stocks has a very low amount of risk and a low return.

What type of market is described by a receding economy and a decline in the stock market?

• Bear Market

• Pig Market

• Sheep Market

• Bull Market

New investors should do all of the following things EXCEPT...

• Estimate how much you will need for retirement to determine how much you need to invest each month

• Invest in a diversified portfolio

• Invest in a low cost index fund

• Pick individual stocks to see if she you beat the market

During a BULL market…

• The unemployment rate in the country increases

• More investors are buying stocks, which causes stock values to increase

• Investors are pessimistic about how the stock market will perform

• The economy is not doing as well

What are the advantages of investing in a mutual fund, rather than an individual stock?

• A mutual fund has a target date to be sold, so you can pay less attention to changes in the market

• A mutual fund always pays out higher dividends than an individual stock

• A mutual fund is actively managed, resulting in lower overall fees

• A mutual fund is diversified, so your investment is lower risk