Financial Flashcards

I got the brilliant idea to study my way to financial savvy the same why I tell my students to study for the TOEFFL exam: FLASH CARDS!!

This is my source for definitions. Here are my words for today: 

MUTUAL FUND: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. 

NO-LOAD FUND: A mutual fund in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party. This is the opposite of a load fund, which charges a commission at the time of  the fund's purchase, at the time of its sale, or as a "level-load" for as long as the investor holds the fund. 

LIPSTICK EFFECT: A theory that states that during periods of recession or economic downturn, consumers will eschew purchases of big-ticket luxury items and seek material solace in smaller indulgences, such as premium lipstick. 

Also known as the "leading lipstick indicator".

RETURN ON INVESTMENT (ROI): A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. 

The return on investment formula:



In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest.  Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

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Ok. That's enough for now. That last one made my head spin, and it's going to take me a while to write all that on a flashcard...