Basics Beginner: Investments

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1.
If you see letters such as AAA, BB, A, etc. in the financial news media and they are in reference to bonds, what are they referring to?
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Credit ratings of the companies that sell the bonds. These letters describe the credit ratings of the companies that sell the bonds. The closer they are to AAA, the better the health of the company, and therefore the less risky they will be.
2.
When you purchase stock from a company, you become _______ of the company.
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An owner. When you purchase stock, you receive shares of ownership from the company.
3.
What does diversification do for a mutual fund?
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Spread risk. By spreading risk among many different securities in a fund, you can reduce the damage that a downturn in a few of them can cause.
4.
What are some reasons why people invest their money?
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All of the above. These -- and many others -- are the most common reasons people invest their money.
5.
If an investor has a time horizon of 18 months to invest for a specific goal, they should consider investing what percentage of their investment dollars in stocks?
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0%. In general, 18 months is too short a time period to invest in stocks due to the chance for short-term price swings. You increase the risk of loss if you have a short timeline until needing to sell your stock investments. A general rule when buying stocks is that investors should be willing to hold stocks for five years or longer.
6.
Cash investments, like a savings account, are often used to save for goals like _______.
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Emergency funds. Because of their easy access and safety, they are a good vehicle to add savings dollars to so you can pay for unexpected emergencies when they occur. Retirement is a long-term goal, and most investors are willing to take some risk with their money to have an opportunity to earn a higher return.