Personal Finance Certification Review

Personal Finance Certification Review

Part 1: Investing

What does “Don’t put all your eggs in one basket” mean?Diversify your money to reduce the risk of losing money; if one investment goes bad you still have other investments to fall back on.

But Low, Sell High:Buy stocks low, sell high to receive a capital gain or profit.

If it sounds too good to be true, then it probably is: There is no return without risk, know the risks and terms of the investment.

Relationship between risk and return: The higher the risk the greater the return.

1. What is investing? Using money to make more money (profit), usually there is some degree of risk involved.

1. Purpose of investing: increase assets, produce wealth, meet long term goals.

1. What type of financial institution handles investments? Brokerage/securities firms, investment banks.

1. What is the difference between saving and investing: Savings: liquid, quick access to money, available for emergencies, future goals and purchases. Investing: long term growth, more risked involved, want to profit.

1. What is the long term value of investing? Increase assets

1. Low risk investments:

* Savings accounts: earn small amount of interest, liquid, FDIC insured.

* Money market account: more interest than savings, limit to # of transactions that can be made per month, insured, require higher min. balance.

* Certificate of deposit: earns more interest than mma or savings, set amount of money is left in an account for a set period of time while accruing interest, if money is withdrawn early there is a penalty

* U.S. Savings Bonds: loan to the government in return you earn interest. Higher rate of interest than regular savings. Safe because backed by government.

7. Medium-High Risk investments: Long term gains

* Stocks: Share of ownership in a corporation. Riskiest investment but have historically outperformed other investments over an extended period of time. Usually can sell stocks back anytime. Largely based on how well the company is doing.

* Mutual Funds: pool of different stocks, bonds, money market funds. Diversified

* Bonds: Debt securities (loan to major corporation) usually get a return if the company does not fail.

* Real Estate: property such as land or buildings (houses, malls, apartment buildings). Investors buy to sell at a higher price or make continuous profits.

* Collectibles: Items that are rare paintings or other art, comic books that increase in value over time. Money is not made if the item is not sold. Small market, high risk.

8. Role of Securities Exchange Commission: Federal government agency that works to protect investors (monitor), uphold fair markets, and promote the build up of capital, administers and enforces federal laws on securities (stocks and bonds)

9. What does a broker do? Financial consultant or wealth advisor on investments gives advice to investors, licensed professional that connects buyers to sellers.

10. What is e-trading? Trading stocks online.

11. What is the difference between a broker and a financial planner? Broker: licensed, bring buyers and sellers together, charge commission fee, usually deal with stocks, securities, equities. Financial Planner: develop strategy to help customer meet financial goals, plan include savings, investing, insurance, taxes, retirement, and estate planning.

12. Stocks: share of ownership in a corporation, also known as securities, equities, common stock.

13: Why do companies issue stocks? To raise money instead of getting a loan. Gain more capital to grow and expand, make more profits, buy equipment, hire employees.

14. Stock classification or types of stock:

* Blue Chips: well established companies

* Growth stocks: mostly technology companies whose earnings are expected to grow above average.

* Income stocks: pay steady dividends (real estate, utilities, energy companies)

* Speculative: High risk stocks

* Common Stocks:

* Preferred Stocks:

15. Capital gains: selling stock for more than you originally paid for it.

16. Capital loss: selling stock for less than you paid.

17. Taxes on stocks: Fee you pay when you sell stocks. Taxes are lower if the stock has been held for at least a year.

18: Dividends: payments to stockholder, receive money based on # of shares of stock they own when the company makes a profit. Usually get quarterly.

19. Buying on the margin: investor borrows money from the brokerage firm to buy a stock, can borrow against stocks they already own. Must pay a fee.

20. Initial Public Offering: First public offering to everyone when a company first decides to issue stocks, called “going public”

21. Stock Markets: (also known as securities markets)

22. Primary market: investment bank sells a company’s stocks to investors and transfers the money to the company. When companies need funds to expand, they sell stocks in this market.

23. Secondary market: When shares of a company’s stocks are traded between buyers and sellers. Corporation does not receive any money from the sale of these stocks. This occurs on the stock market.

24. Stock exchange stock market, regulated financial market where securities are bought and sold. Supply and demand controls the prices in the stock market.

25. What are the two main stock exchanges in the U.S? NYSE: largest located on Wall St, mostly big corporations such as Walmart, General Electric. NASDAQ: First electronic stock exchange in the world, focused on ta.ch and start up companies such as Apple, Microsoft

26. What are stock indexes: These are used to measure the ups and downs of the overall market.

27. Purpose of stocks: to make a profit; businesses: reinvest in their businesses, investors: to increase wealth, ownership to receive profits, dividends, capital gain.

28. Be able to read a stock table:You can find these in newspapers, news, internet, cellphones.

Know the following terms:

Stock Symbol: helps find company’s stock information quicker

High: highest price sold for a day/week

Low: lowest price sold for a day/week

Open price: price at start of day Closing Price: price at end of day

Net Change: how much stock changes from last sale

Dividends: cost share of stock

Volume of trading: share volume, amount of shares traded

PE ratio: price/earning price of a share of stock divided by company’s earnings (profit) per share over last 12 months.

29. What factors have an influence on stock prices? When should you avoid investing? Interest rates, inflation, economic conditions, news, new products, supply and demand. When should you avoid: need for cash, can’t afford to lose capital, retired and need low risk investments.

30. Bonds are: loans or debt investments purchased by investors, receive interest plus principal after specific period of time.

Types of bonds:

* Treasury Bill or T-bill: short term few days to year to reach maturity, secure, low risk, guaranteed return.

* U.S. Government: issued by U.S. Department of Treasury safest bond because it’s backed by government,

Series 1 bonds:

* Municipal: tax free, issued by city or local gov. used to fund schools, highways, libraries, etc, lower interest rate than corporate bonds and less risky

* Corporate bonds: issued by corporations when the business needs to purchase equipment or expand.

Why do people buy bonds? Safe and secure, guaranteed return, make great gifts, higher rate of return than banking products such as money markets, cd’s, and savings.

31. Mutual funds: pool stocks and bonds, money markets, diversification, moderate risk, managed by professionals.

Purpose: Spread investments over many different securities.

Why do people purchase mutual funds? Diversifications – if one stock does poorly, the others make up the loss, keep the investment stable, professionally managed, moderate risk, affordable, convenient.

32. Investment portfolio (also known as stock or equity portfolio): Collection of different types of investments that belong to you, stocks, bonds, cash investments, mma, savings, checking, mutual funds.

May change over time, what causes this change?Portfolio restructuring, Goals changing.

33. Risk tolerance (determines the types of investors)

Conservative: low risk

Moderate: medium risk

Aggressive: high risk

34. Diversification: don’t put all your eggs in one basket.

What is the purpose? Reduces the risk of losing your money is something were to occur.

35. Why should an individual invest? To increase and diversify portfolio to meet changing and long term financial goals.

36. Investment in stocks, bonds, mutual funds are affected by interest rates, inflation, economic conditions, news, new product. Investors may choose to: buy or sell if they change their goals, spending needs, change, start new business, college education, retirement.

Part 2 Insurance:

The lower the premium the higher the deductible

37. Type of financial institution: insurance company

38. People who sell insurance are called: insurance brokers, agents, or saleperson

39. How does insurance work? Purchase from an insurance agent, shared risk between you and the insurance company, insurer places all money into a pool that is used to cover expenses and pay claims. You pay the insurance to assume financial risk on your behalf.

Purpose of insurance: protect people against financial losses caused by unexpected events.

Interesting/weird insurance coverage people may buy: Singer insuring voice, dancer insuring legs, hand models insure hands, coffee tasters insure tongue, surgeon insure hands.

Insurance is a form of risk management why? To protect against risk of loss

How does the degree of risk influence the cost of insurance premiums? The more of a risk you are, the higher the premium.

What insurance(s) should you always have or if you are young and single with no dependents? Health, auto, and disability

When comparison shopping for insurance you should choose insurance based on your needs and what is affordable.

40. Deductible: the amount of money you pay out of pocket before the insurer will pay a claim (100-1000 or more) affects the price of premium.

Premium: regular payment to provide coverage of your insurance.

Policy: detailed legal contract that outlines the term of the insurance coverage includes what it will cover and cost.

Coverage: amount of protection the insurer will provide when you file a claim.

Claim: requests by policyholders for the insurer to pay for a loss. Must be submitted by the policyholder if an accident or loss occurs.

41. Purpose of life insurance and who needs it? Covers funeral expenses, debts, and dependents when someone passes away.

How much do you need? Typical family with kids – 70% of policyholder’s income for 7 years; married no kids – 50%, single parent - $10,000 for each year until the youngest reaches 18.

Types of life insurance:

Term life insurance – held for short period of time 1-30 years during key periods such as when you have young kids, mortgage, or other large debt. No cash value, only pays death benefits, and only pays during term coverage.

Whole life – Fixed premium, builds cash value allows insured to get some money back if you drop the policy or withdraw as loan.

How do you determine how much life insurance you need? Cost of mortgage/other debts and dependents.

Value upon cancellation of policy: whole life – cash value: amount of money you get back if you decide to give up the policy, based on premiums paid plus interest earned, term life: nothing gained

42. What does health insurance cover? Regular doctor visits and routine tests, short hospital stays, and some surgery. (Does not cover ling term illness, serious injuries, or vision and dental.)

Co-pay: flat fee the patient pays for covered medical services when you go to the doctor.

HMO: health maintenance organization, emphasize preventive care, no deductibles to pay, must go to the doctor under contract, co-pay at time of service.

PPO: preferred provider organization, networks created by doctors and hospitals; make deals with insurers, premiums are higher, not required to go to doctor in network.

Annual deductible – how does it work? Must meet deductible, by paying up to a certain amount, before insurance begins to pay claims. Starts over each year.

How does the amount of the deductible influence the cost of the premium? Higher the deductible, the lower the premium. Vice.versa. If you rarely get sick, you may benefit from a high deductible and low premium.

Pre-existing conditions (insurance must cover)

Insurance cost less for people with: Good health

43. Property insurance covers: home and possessions inside, liability protection, cost of repairing/replacing damaged, lost, stolen property.

Types of property insurance:

Renters- Covers damage, loss of use, only covers property.

Homeowners insurance- Covers physical structure and things inside, sheds, garages, liability coverage, damage you cause to neighbor’s property.

Mortgage insurance: When financing the home, coverage protects lenders against default by borrower. If borrower stops paying on mortgage, insurance company insures lender will be paid in full.

How is coverage needed determined for property insurance? Take inventory of all your possessions and valuables, decide what you want to insure, insure as replacement value or actual cash value, take pictures, store safely outside of the home to use to file claim.

Replacement value: insurer pays you the cost of replacing damaged or lost property, depreciation has no part. Check based on what the items costs today to replace or rebuild.

Actual cash value: covers what you paid for the property minus depreciation, costs less, lower premiums because insurer pays less over time.

Additional property insurance/personal property floater: extra coverage for high valued items.

44. Disability insurance: covers you if you were to become disabled. You can purchase short term or long term. Covers loss of wages.

Long term care insurance:

45. Purpose of auto insurance: protects you against liability in an accident, financial losses caused by wrecks, medical treatment, car repairs, and lawsuits.

Factors that affect cost (premium): age, gender, marital status, type of car, cost of repairs, mileage, location, law enforcement, driving record, claims you make, credit history.

How to reduce the cost of auto insurance: increase the deductible, cancel collision insurance, garage the car, install security alarm, maintain good driving record, avoid submitting small claims, drivers ed course,

Assigned risk pool: drivers with bade driving records and many insurance claims end up here after they lose their auto insurance and cannot get a new policy with another insurer. They are randomly selected by an insurer and are charged premiums that are three times higher than normal rates.

Bodily injury liability: protects you from paying the full legal or medical expenses of someone who is injured or protects you against claims that an injured person who was not in your vehicle could make against you, required by the state.

Property damage liability: When you damage another person’s property with your car, buildings, signs, streetlights, claims others can make against you.

Comprehensive: covers financial loss due to weather, fire, theft, vandalism, falling objects, coverage without considering who was at fault, towing, emergency roadside, car rentals.

46. Collision coverage: usually terminated when vehicle is paid in full, covers the cost of getting your car repaired after an accident, your insurance covers the cost even if the other driver was at fault. Your insurance may seek reimbursement.

47. Why is it important to comparison shop for auto insurance periodically? You may be paying too much or what you are paying may not cover your assets if there were to be a loss.

Underinsured: Not enough, underestimate the value of your property

Overinsured: too much

48. Insurance premiums can be paid: once a year, semi-annually, quarterly, or monthly.

Part 3 Banking and Money

A penny saved is a penny earned: When you save you earn more because of interest. If you save consistently, your savings will grow. It is good to save money..

$1 today is worth more than $1 tomorrow: It is more valuable to save money rather than spend it right away. Time value of money: the money you receive today can earn interest and gain value overtime. Make your money grow by putting it into an interest bearing account.

Time value of money:

49. Types of financial institutions: banks (profit); retail, commercial, savings, and loans, credit union (non-profit)

Opening a bank account: may require a deposit and a minimum balance, way to save, protect, and manage your money.

Advantages:insured, interest, access by atm, debit cards, etc.

Factors to consider when shopping for a bank: interest rates and fees on checking, savings, cd’s, loans, availability of products and services such as free checking, savings without minimum balance or low balance, online banking, ATM availability, bank hours.