Investing 101

What does it mean to invest?

• To spend all your money at once.

• To keep your money under your mattress

• To allocate money, time, or resources into a particular endeavor with the expectation of generating a positive return or profit

• To donate all your money to charity

Answer explanation

Investing is about allocating resources (like money or time) with the expectation of generating a positive return or profit over time.

What is one potential benefit of investing in the stock market?

• Guaranteed returns

• Better potential returns compared to other forms of investment

• No risk of losing money

• Immediate wealth

Answer explanation

While the stock market can be risky and returns are not guaranteed, it has the potential for better returns compared to many other forms of investment.

How does investing help counter the effects of inflation?

• By guaranteeing a fixed return

• By reducing the cost of goods and services

• By potentially growing your money faster than inflation is shrinking it

• By increasing your income

Answer explanation

Investing can potentially grow your money at a rate that outpaces inflation, thereby preserving or even increasing the purchasing power of your money.

What is appreciation in the context of investing?

• A formal recognition of the value of an investment

• An increase in the value of an asset over time

• The interest earned on an investment

• The dividends paid by a company

Answer explanation

In investing, appreciation refers to an increase in the value of an asset over time. It's one of the ways investors can earn money.

What are dividends?

• Payments made by companies to their investors as a way to share their profits

• A type of investment strategy

• The cost of investing in a particular company

• A tax imposed on investment income

Answer explanation

Dividends are payments made by a company to its shareholders out of its profits. They represent a way for investors to earn income from their investments.

What is simple interest in the context of investing?

• Interest that is paid only on the initial amount (or principal) that was deposited

• Interest that is paid on both the initial amount and on the interest previously added to the deposit

• Interest that is paid on the profit made from an investment

• Interest that is paid on the dividends of an investment

Answer explanation

Simple interest is interest paid only on the original principal, not on the interest accrued.

What is a Dividend Reinvestment Plan (DRIP)?

• A plan where you invest only in dividend-paying stocks

• A plan where dividends are reinvested to purchase more shares of the company

• A plan where dividends are used to pay off your debt

• A plan where dividends are donated to charity

Answer explanation

A Dividend Reinvestment Plan (DRIP) is a plan offered by a corporation that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.

Which type of investments act as loans and pay interest over time?

• Stocks

• Mutual funds

• Treasury bills

• Real estate

Answer explanation

Treasury bills (or T-bills) are short-term securities that mature in one year or less from their issue date. They are issued with a discount from the par value (also called face value), and the government pays you the face value at maturity. The difference between the purchase price and the face value is the interest or return you earn.

What is market risk?

• The risk of losing all your investment

• The risk that the market will close

• The risk that comes from fluctuations in market prices

• The risk of investing in the wrong market

Answer explanation

Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged against. It includes interest rate risk, inflation risk, currency risk, liquidity risk, and political risk.

What does it mean for an asset to "appreciate"?

• The asset decreases in value over time

• The asset remains the same price over time

• The asset increases in value over time

• The asset is sold for less than its purchase price

Answer explanation

When an asset appreciates, it increases in value over time. This is one of the ways that investments can earn money.