Basics Beginner: Investments

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1.
In mutual funds, a sales charge is used to compensate the mutual fund manager.
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False. It is to compensate the financial advisor for providing advice. The expense ratio is what compensates the mutual fund manager.
2.
During your retirement years, what do you need your investments to do the most of for you?
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Provide income. During your later years, you will need money to live on, and that will ideally come from your investments. Although growth is good, it also comes with risk, which you don't want during your retirement.
3.
Which of the following is not a characteristic of a cash investment?
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Moderate return. Cash investments have historically provided low returns because they are safe and liquid.
4.
If you own a bond with an interest rate of 4% and rates increase to 5%, what will happen to the value of the bond if you try to sell it?
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It will decrease. If interest rates rise, the price of the bond on the market will decline because investors will seek bonds with these new, higher rates. This occurs with US government bonds too, and if you were to sell it before it matures, you would sell for less than you invested. If you hold the US government bond until its maturity date, you will receive all of your principal back.
5.
What ultimately causes stock prices to rise?
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Companies increase their profits in the future. Ultimately, a rise in profits causes stocks to grow in value, which leads to rising stock prices.
6.
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.