Title: Investing Fundamentals — LearnCoachAssist

Q: What is investing?
A: Investing is the process of allocating money to assets or ventures with the expectation of generating income or profit over time. It differs from saving by involving higher risk for potentially higher returns. Common goals include wealth building, retirement funding, or beating inflation.

Q: What is the difference between saving and investing?
A: Saving involves putting money into low-risk, liquid accounts like bank deposits for short-term needs and capital preservation. Investing uses money to buy assets like stocks or bonds for long-term growth, accepting higher risk for potential higher returns. Savings earn minimal interest, while investments aim to outpace inflation.

Q: Why should individuals invest?
A: Investing helps grow wealth over time through compounding returns, outpace inflation, and achieve financial goals like retirement or home purchase. It provides passive income via dividends or interest and offers tax advantages in certain accounts. Without investing, purchasing power erodes due to rising costs.

Q: What is risk in investing?
A: Risk is the possibility of losing some or all of the invested principal or underperforming expectations. It includes market risk, credit risk, and liquidity risk. Higher risk typically correlates with higher potential returns.

Q: What is return on investment?
A: Return on investment (ROI) measures the gain or loss generated on an investment relative to its cost, expressed as a percentage. It can come from capital appreciation, dividends, or interest. Total return includes both price changes and income.

Q: What is the risk-return tradeoff?
A: The risk-return tradeoff states that potential returns increase with risk; low-risk investments like bonds offer modest returns, while high-risk ones like stocks provide higher average returns over time. Investors must balance this based on their tolerance and goals. No risk-free investment guarantees high returns.

Q: What are stocks?
A: Stocks, or equities, represent ownership shares in a publicly traded company. Owning stock entitles holders to potential capital gains from price appreciation and dividends from profits. They offer high growth potential but with significant volatility.

Q: What are bonds?
A: Bonds are debt securities issued by governments or corporations to borrow money, promising periodic interest payments and principal repayment at maturity. They provide fixed income and lower risk than stocks, acting as a portfolio stabilizer. Bond prices move inversely to interest rates.

Q: What is a mutual fund?
A: A mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds, or other assets, managed by professionals. They offer instant diversification and accessibility but charge fees like expense ratios. Shares are priced at net asset value (NAV) once daily.

Q: What is an ETF?
A: An exchange-traded fund (ETF) is a fund that holds a basket of assets like stocks or bonds and trades on exchanges like individual stocks throughout the day. ETFs provide diversification, low costs, and tax efficiency. They track indexes, sectors, or themes.

Q: What is an index fund?
A: An index fund is a type of mutual fund or ETF designed to replicate the performance of a market index, like the S&P 500, through passive management. It offers broad market exposure at low costs with minimal trading. Long-term returns match the index minus small fees.

Q: What is diversification?
A: Diversification is spreading investments across various assets, sectors, or geographies to reduce risk. It works because assets don't move perfectly together, cushioning losses in one area. "Don't put all eggs in one basket" is the key principle.

Q: What is asset allocation?
A: Asset allocation is dividing a portfolio among different asset classes like stocks, bonds, and cash based on risk tolerance, goals, and time horizon. It drives most long-term returns and risk levels. Common models include 60/40 stocks/bonds.

Q: What is compound interest?
A: Compound interest is earning interest on both the initial principal and accumulated interest over time, leading to exponential growth. It's the "eighth wonder of the world" per Einstein, powering long-term investing. Frequency of compounding affects growth rate.

Q: What is the Rule of 72?
A: The Rule of 72 estimates how long it takes for an investment to double at a fixed annual return: divide 72 by the rate (e.g., 72/6% = 12 years). It's a quick mental math tool for illustrating compounding. Assumes constant returns, which vary in reality.

Q: What is inflation and its impact on investing?
A: Inflation is the rate at which prices rise, eroding purchasing power over time. Investors need returns exceeding inflation to grow real wealth. Fixed-income assets like bonds suffer most during high inflation.

Q: What are dividends?
A: Dividends are periodic payments from company profits to shareholders, often quarterly. They provide income even if stock prices fall and signal financial health. Dividend yield is dividend per share divided by price.

Q: What is capital appreciation?
A: Capital appreciation is the increase in an asset's market value over time, generating profit when sold. It's the primary return driver for growth stocks. Unrealized until sold, subject to capital gains tax.

Q: What is a brokerage account?
A: A brokerage account is an investment account held with a firm allowing buying/selling of securities like stocks and ETFs. Types include taxable, margin, or cash accounts. Online brokers offer low commissions and tools.

Q: What is dollar-cost averaging?
A: Dollar-cost averaging involves investing fixed amounts regularly regardless of price, buying more shares when low and fewer when high. It reduces timing risk and average cost basis over time. Ideal for volatile markets and long-term plans.

Q: What is market timing?
A: Market timing attempts to predict highs/lows to buy low and sell high. It's risky and most investors underperform by trying it. Evidence favors "time in the market" over timing.

Q: What is buy-and-hold investing?
A: Buy-and-hold involves purchasing quality assets and holding long-term through market fluctuations, benefiting from compounding. It minimizes taxes, fees, and emotions. Historically outperforms frequent trading for most.

Q: What is a bull market?
A: A bull market is a prolonged period of rising asset prices, typically 20%+ from lows, driven by optimism and growth. Investors feel confident buying. Lasts years on average.

Q: What is a bear market?
A: A bear market features falling prices by 20%+ from peaks, often due to recession fears or high valuations. It prompts selling but creates buying opportunities. Recovery usually follows.

Q: What is portfolio rebalancing?
A: Portfolio rebalancing restores target asset allocation by selling overperforming assets and buying underperformers. Done annually or when drifted 5-10%, it enforces "sell high, buy low." Controls risk drift.

Q: What is the price-to-earnings (P/E) ratio?
A: The P/E ratio measures a stock's price relative to earnings per share (EPS), indicating valuation. Low P/E may signal undervaluation; high suggests growth expectations. Compare to industry averages.

Q: What are earnings per share (EPS)?
A: EPS is a company's net profit divided by outstanding shares, showing per-share profitability. Key for valuation metrics like P/E. Trailing EPS uses past data; forward estimates future.

Q: What is return on equity (ROE)?
A: ROE measures profitability from shareholders' equity: net income divided by equity. High ROE indicates efficient profit generation. Above 15% is strong; compare peers.

Q: What is debt-to-equity ratio?
A: Debt-to-equity (D/E) ratio shows financial leverage: total debt divided by shareholders' equity. Low D/E suggests stability; high indicates risk. Industry norms vary.

Q: What is beta in investing?
A: Beta measures a stock's volatility relative to the market (beta=1 matches market). Beta >1 is more volatile; <1 is defensive. Used in CAPM for expected returns.

Q: What is alpha?
A: Alpha measures a portfolio's excess return over its benchmark after risk adjustment. Positive alpha shows skill; zero means market-matching. Hard to sustain consistently.

Q: What is the Sharpe ratio?
A: The Sharpe ratio evaluates risk-adjusted return: (portfolio return - risk-free rate) / standard deviation. Higher is better, rewarding returns per unit of risk. Above 1 is good.

Q: What is standard deviation?
A: Standard deviation quantifies an investment's price volatility; higher means greater risk. About 68% of returns fall within one standard deviation of average. Annualized for comparisons.

Q: What is a Roth IRA?
A: A Roth IRA is a retirement account with after-tax contributions, allowing tax-free qualified withdrawals in retirement. Contribution limits apply; income eligibility required. Ideal for expecting higher future taxes.

Q: What is a 401(k)?
A: A 401(k) is an employer-sponsored retirement plan with pre-tax contributions, often matching. Funds grow tax-deferred; withdrawals taxed as income post-59½. High limits vs. IRAs.

Q: What are capital gains taxes?
A: Capital gains taxes apply to profits from selling appreciated assets; short-term (≤1 year) taxed as ordinary income, long-term at lower rates (0-20%). Holding over a year saves taxes. Losses offset gains.

Q: What is tax-loss harvesting?
A: Tax-loss harvesting sells losing investments to realize losses offsetting gains, reducing taxes. Repurchase similar assets after 30 days to avoid wash-sale rule. Enhances after-tax returns.

Q: What is the 4% rule?
A: The 4% rule suggests safe initial withdrawal rate of 4% from retirement portfolio, adjusted for inflation annually, lasting 30 years. Based on historical simulations. Conservative at 3-3.5% now.

Q: What is value investing?
A: Value investing buys undervalued stocks trading below intrinsic worth, holding until market recognizes value. Pioneered by Benjamin Graham; Warren Buffett practices it. Focuses on fundamentals like low P/E.

Q: What is growth investing?
A: Growth investing targets companies with high earnings growth potential, often high P/E ratios. Tech stocks exemplify; prioritizes future over current metrics. Volatile but high reward.

Q: What is dividend investing?
A: Dividend investing focuses on stocks with consistent, growing payouts for income and reinvestment. Dividend aristocrats raised dividends 25+ years. Lower volatility than market.

Q: What is fundamental analysis?
A: Fundamental analysis evaluates securities using economic, financial, and qualitative factors like earnings, balance sheets, and management. Aims to find intrinsic value. Long-term oriented.

Q: What is technical analysis?
A: Technical analysis studies price charts, patterns, and volume to predict future moves, assuming history repeats. Uses tools like moving averages, RSI. Short-term trading focus.

Q: What is the efficient market hypothesis (EMH)?
A: EMH posits markets reflect all available information in prices, making consistent outperformance impossible. Weak, semi-strong, strong forms vary by info type. Supports passive indexing.

Q: What is modern portfolio theory (MPT)?
A: MPT, by Harry Markowitz, optimizes portfolios for maximum return at given risk via diversification. Uses efficient frontier graph. Assumes normal returns, rational investors.

Q: What is the Capital Asset Pricing Model (CAPM)?
A: CAPM calculates expected return: risk-free rate + beta × (market return - risk-free). Prices risk via beta. Foundation for many strategies.

Q: What is behavioral finance?
A: Behavioral finance studies psychological biases affecting investor decisions, like overconfidence or herd mentality. Explains market anomalies vs. EMH. Promotes disciplined investing.

Q: What is loss aversion?
A: Loss aversion is the tendency to fear losses more than equivalent gains (twice as painful). Leads to holding losers, selling winners too soon. Counters with rules-based approach.

Q: What is ESG investing?
A: ESG investing incorporates environmental, social, governance factors alongside financials for sustainable choices. Growing due to demand; screens or tilts portfolios. Debated on performance drag.

Q: What are market cycles?
A: Market cycles include accumulation, markup, distribution, markdown phases driven by sentiment and fundamentals. Average stock market cycle ~4 years. Investing through them requires patience.

Q: What is liquidity in investing?
A: Liquidity is how quickly an asset converts to cash without price impact. Cash is most liquid; real estate least. Illiquid assets risk forced sales in downturns.