Basics Beginner: Investments

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1.
When inflation occurs, it means a dollar in the future will be worth more than a dollar today.
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False. Inflation causes the price of products and services to go up over time, so a dollar today will not buy the same amount of products and services in the future.
2.
What is asset allocation?
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Determining how much money to spend on different types of assets. Asset allocation is a big term, but it refers to how we distribute our money among investments.
3.
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.
4.
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.
5.
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.
6.
The primary risk associated with cash investments is _______.
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Inflation. Cash investments provide safety of principal and liquidity. But because of this, they offer a very low rate of return, often lower than the rate of inflation.