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FPQP - MODULE 6 - INVESTMENT BASICS AND STRATEGIES (SCORED) A+
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FPQP - MODULE 6 - INVESTMENT BASICS AND STRATEGIES (SCORED) A+
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FPQP - MODULE 6 - INVESTMENT BASICSAND STRATEGIES (SCORED) A+
LO 6-1: The importance of liquidity Answer - -see page 3
-cash equivalents = investments that are short-term and very liquid. don't make
much of a return
-liquidity=ability to easily convert to cash with little to no loss or principal
Cash equivalents: savings accounts, money market accounts and funds,
certificates of deposits (CDs), treasury bills, and stable value funds
LO 6-1: Money Market Accounts and Funds Answer - -see page 4
-typically pay more than a savings account
-money market accounts = offered by banks. yield less than money market
funds but one advantage is that money market accounts have FDIC insurance
(money market funds don't) ....credit unions have the National Credit Union
Share Insurance Fund (NCUSIF) which is similar to FDIC.
-some mutual funds may offer partially FDIC accounts but that is from a
partnership with a bank
LO 6-1: Certificates of Deposit (CDs) Answer - -see page 5-6
,-available in different maturities. for an emergency fund would want a maturity
of one year or less but you can stagger maturities and created a CD ladder (as
CDs mature then reinvest in more CDs)
-if a CD is redeemed early the penalty is that you would lose some of the
interest gained but not any of the principal
-CDs are FDIC/NCUSIF insurance
LO 6-1: Treasury Bills Answer - -see page 6
-backed by the u.s. gov't so very safe
-issued for terms of 4, 13, 26, and 52 weeks and could also be laddered
-can be purchased directly from the gov't (see website in textbook) or through
brokerage accounts (usually with a fee)
-T-bills are bought at a discount and then mature at par
LO 6-1: Stable Value Funds Answer - -see page 6
-usually found in retirement funds (401k) and offer higher yields than money
market accounts
-not guaranteed or insured by the gov't and it is possible that there could be a
minimal loss of principal
,-pools of money invested in short to medium term government, corporate, and
mortgage bonds
-to protect the principal of the bonds the fund purchases insurance from either
a bank or insurance company
LO 6-1: Definition of Stocks and Equity Answer - -see page 7
-equity=ownership, specifically stock ownership
-investors can either loan the firm/company money (by buying bonds) or buy a
small part of the firm (by purchasing stock)
-bonds provide steady income and return of principal at maturity whereas
stocks have the potential for greater returns
LO 6-2: Common stock - capitalizing of a business Answer - -see pages 7-8
-when a business is first created it relies on loans from family and friends and
personal loans...then when a business becomes successful it looks for ways to
expand but it needs capital to do that
-stock is permanent capital because unlike bonds it has not maturity
-stock is issued as common or preferred stock
-common stock=direct ownership
, -preferred stock=behaves more like debt. is not direct ownership but can often
be converted into common shares
LO 6-2: Common Stock - public and private stock ownership Answer - -see
pages 8-9
-publicly owned stocks are traded on the various stock exchanges or on the
over-the-counter (OTC) market
-privately held corporation are owned by a limited number of individuals and
the stock is not traded on exchanges. these stocks are more difficult to buy or
sell
-closely held companies=have most but not all their shares held by one
individual or family
-venture capitalists=investors who invest in start-up companies before they go
public
-most publicly traded stock is held in "book entry" form meaning a stock
brokerage firm or bank holds the shares for the investor
LO 6-2: Common Stock - Stockholder Rights-Dividends Answer - -see page 9
-common stockholder have dividend rights, voting rights, preemptive rights,
and certain other legal rights
-dividends=part of the company's profits that are distributed to shareholders
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