Foundations in Personal Finance Chapter 8

Diversification The practice of dividing the money a person invests between several different types of investments in order to lower risk
Investing The process of setting money aside to increase wealth over time for long-term financial goals such as retirement
Investment Account or arrangement in which a person puts his/her money for long-term growth; invested money should not be used for a suggested minimum of five years
Liquidity Quality of an asset that permits it to be converted quickly into cash without loss of value; availability of money
Portfolio A list of your investments
Risk Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit
Risk-Return Ratio Relationship of substantial reward compared to the amount of risk taken
Share Piece of ownership in a company, mutual fund or other investment
Stocks Securities that represent part ownership or equity in a corporation
Tax-favored Dollars Money that is invested, either tax deferred or tax free, within a retirement plan
U.S. Securities and Exchange Commission (SEC) The government agency responsible for regulating the stock market. It was created in 1934 to increase public trust after the 1929 stock market crash and the years of the Great Depression.
Federal Deposit Insurance Corporation (FDIC) The U.S. federal agency that insures deposits in commercial banks. It was created to restore public trust in banks after the 1929 stock market crash. It replaced the former Federal Savings and Loan Insurance Corporation in 1989.
Federal Reserve The central (federal) banking system of the United States.
Internal Revenue Service (IRS) A U.S. federal agency responsible for collecting taxes and for the interpretation and enforcement of the Internal Revenue Code (laws).
Certificate of Deposit (CD) Typically at a bank, it is a savings account with a slightly higher interest rate because of a longer savings commitment
Money Market A low-risk bank savings account with check-writing privileges
Bond A debt instrument by which the company owes you money; a form of IOU
Mutual fund An investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
War Bonds (a.k.a. Defense Bonds) The purpose was to finance military operations during war time. The bonds yielded a mere 2.9% return after a 10-year maturity.
Dividend Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders; generally distributed in the form of cash or stock.
25% Growth Stock Mutual Fund (Mid-Cap) Fund that buys stock in medium-sized companies that have experienced some growth and are still expanding
25% Growth and Income Stock Mutual Fund (Large-Cap) Fund compromised of large, well-established companies
25% Aggressive Growth Stock Mutual Fund (Small- Cap) Fund that seeks to provide maximum long-term capital growth from stocks of primarily smaller companies; the most volatile fund
25% International Stock Mutual Fund Fund that contains international or overseas companies
Roth IRA Named for Senator William Roth of Delaware, who authored this section of the Taxpayer Relief Act of 1997
annuity A savings account sold by an insurance company, designed to provide payments to the holder at specified intervals, usually after retirement
Education Savings Plan (529 Plan) A savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996.
Gold Has a 50-year track record of 4.1% returns
Commodities Agricultural or mining products
Day Trading The buying and selling of stock purchases each day through the practice of speculation
Viaticals When someone with a terminal disease sells his life insurance policy for less than face value
security A financial asset(such as stock or bond) that can be bought or sold; a tradable financial asset
Simplifies Employee Pension Plan (SEP) A self- employed person may deduct up to 15% of their net profit on the business by investing in a SEP
401(k) A retirement saving plan offered by a corporation to its employees.
403(b) Found in nonprofit organizations such as churches, hospitals, and schools
457 Deferred compensation, which means you are deferring or putting off compensation. Usually this is available for government employees.
T/F: A single stock would be a good place to keep your emergency fund. False
T/F: Diversification lowers risk with investing. True
Long-term investments properly diversified include the following mutual funds: growth, growth and income, international, aggressive growth
Which is a good investment option? Mutual funds
Which statement is true about liquidity? The more liquid an investment, the less return

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