Knowing key financial terms is half the battle when it comes to understanding money and finance. Make sense of what you already know, and pick up a term or two, with our quiz.
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What is a stock?
A stock represents a share of ownership in a corporation. The number of shares owned also determines how much of a company the shareholder owns. If a person owns 30 shares and the company has 900 shares, then that shareholder owns about 3% of the company.
When a bank pays account holders interest on both the amount deposited and on interest accumulated to date, this is known as:
Compound interest is paid on both the original principal (the amount you deposit into an account) and on interest accumulated to date. Compounding can make your savings grow exponentially.
A bond is:
A bond is a promise to pay back a sum of money borrowed (principal) plus interest over a specified period of time. Governments and corporations sell bonds to raise capital.
Due to inflation, the price of a haircut or your favorite box of cereal increases.
True. With inflation, the cost of goods and services, like your groceries and your haircuts, goes up. In an inflationary economy, the amount of goods and services that can be purchased with a dollar declines.
Buying U.S. savings bonds is a risky way to save.
False. U.S. savings bonds are backed by the federal government, so your money is safe.
Insurance and diversification are both strategies to minimize:
Insurance and diversification are both ways to minimize risk and protect against financial loss. Diversification is the opposite of putting all your eggs in one basket. It means holding lots of different types of investments, so that if the value of one type of investment plummets, your loss will be balanced by the performance of your other investments.
Which of these items is a form of debt:
All of the above items are forms of debt, or an amount of money borrowed, which has to be paid back, usually with interest.
If you deposit $1,365 in an account earning 8% compound interest, how long will it take for your money to double?
Provided you leave everything in the account, your money will double in about 9 years. To figure out how long it takes to double your money with compound interest, divide 72 by the interest rate – in this instance 72 ÷ 8 (representing 8% interest) = 9 (years to double your money). This is known as The Rule of 72.
Which involves the most risk, or chance of experiencing financial loss?
Buying the stock is the riskiest option. Savings accounts and CDs are typically insured by the federal government up to a set limit. The same is not true for investments in stock – you could experience financial gain if the stock increases in value, but you could also lose everything if the company fails.
Which involves the greatest potential for return, or making money?
Historically, stocks have provided the best returns over the long-term, but their year-to-year fluctuations make them riskier than most bonds or cash.