1. What is the difference between a stock and a bond?

A stock represents ownership in a company, also known as shares or equity. When you buy a stock, you become a shareholder and have a claim on the company's assets and earnings. On the other hand, a bond is a type of debt security that represents a loan made by an investor to a borrower (typically a corporation, government, or government agency). Bondholders are creditors, not owners, and earn interest on their investment while the loan is outstanding.

2. How do you calculate the future value of an investment?

The future value of an investment can be calculated using the formula: FV = PV x (1 + r)^n, where FV is the future value, PV is the present value (the initial investment), r is the annual interest rate, and n is the number of years. For example, if you invest $1000 at an annual interest rate of 5% for 10 years, the future value would be $1000 x (1 + 0.05)^10 = $1628.89.

3. What is diversification and why is it important in investing?

Diversification is a risk management strategy that involves spreading investments across various assets or asset classes to reduce exposure to any single investment. It aims to maximize returns by investing in various investments that would each react differently to the same event. Diversification is important in investing because it helps to minimize unsystematic risk (company-specific risk) and increases the likelihood of achieving more consistent returns over time.

4. How do you calculate compound interest?

Compound interest is calculated using the formula: A = P(1 + r/n)^(nt), where A is the future value of the investment/loan, P is the principal amount, r is the annual interest rate (in decimal), n is the number of times interest is compounded per year, and t is the number of years. For example, if you invest $1000 at an annual interest rate of 5%, compounded quarterly for 10 years, the future value would be 1000(1+0.05/4)(4*10)=1647.01.

5. What is the difference between a traditional IRA and a Roth IRA?

A traditional IRA (Individual Retirement Account) allows individuals to make tax-deductible contributions to a retirement account and then pay taxes when they withdraw the money in retirement. A Roth IRA allows individuals to make after-tax contributions to a retirement account and then withdraw the money tax-free in retirement. The key difference between these two types of retirement accounts lies in when taxes are paideither upfront with a traditional IRA or at withdrawal with a Roth IRA.

6. How do you calculate the price-earnings ratio (P/E ratio)?

The price-earnings ratio (P/E ratio) is calculated by dividing the market value per share by the earnings per share (EPS). The formula is: P/E ratio = market price per share / EPS. The P/E ratio represents how much investors are willing to pay for each dollar of earnings. For example, if a company's stock trades at $50 per share and its EPS is $5, its P/E ratio would be $50 / $5 = 10.

7. What is beta in finance?

Beta is a measure of an investment's risk relative to the market as a whole. Beta quantifies the historical volatility of an investment compared to that of the market as a wholea beta of 1 indicates that an investment's price will move with the market, while a beta less than 1 indicates less volatility than the market, and a beta greater than 1 indicates more volatility than the market. Beta helps investors understand how much systemic risk they are taking on when investing in specific assets compared to simply investing in a broad market index fund or exchange-traded fund (ETF).