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FP/101 FP101 FP 101 Week 8 Investments Worksheet

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FP 101 Week 8 Investments Worksheet Investments Worksheet : Answer the following questions in at least 50 words each: • What are the main differences between a 401K and a Roth IRA? These two plans are beneficial when it comes to saving money for your retirement. A nonqualified 401k distribution is pro-rated between contributions (nontaxable) and earnings (taxable). A 401K is offered through your employer and is matched in company stock and is pre-taxed. There are no income limits. The employee designates a portion of their paycheck to be diverted into the plan. 401k account, you would be taxed on 50% of your nonqualified distributions regardless of your amount you have vested. A Roth IRA is opened by the individual and nonqualified Roth IRA distributions can be taken tax-free as long as they do not exceed the value of your contributions. IRA contributions are after tax and can be withdrawn without penalty. They are more flexible than a 401K because you can open a Roth IRA almost anywhere you choose. • How would you explain the difference between a stock, a bond, and a mutual fund? A stock is owned by the company, and it goes according to how the company performs. When you are investing in stocks you have to be really careful because there is always a risk. If the company does well, then you do well, but; if they tank so do you. A bond is considered a conservative type of an investment. Bonds are less of a risk than stocks and the main way you lose money on a bond is if the company or government issuing the bond defaults on their obligations. A mutual fund is another way you can invest in cash alternatives. Your money goes into a large fund with other investors and is stated by an investment strategy. • What are the risks and rewards of investing? When you invest it comes with a certain amount of gain and some amount of disappointments. The higher the risk, the higher the potential return must be to compensate for the increased risk exposure. You have to be able to understand that when you go into an investment some of the risk factors can be; the risks can be that you will lose money, you may not achieve your financial goal, and your investment may not grow and if you are willing to invest with a higher risk. These are some of the worries about investing your money. The rewards of investing can be that your investments can grow in value depending on the stock market. The more the risk that an investment won’t succeed, the higher the potential reward will be for the investor. • How can you minimize the risks associated with investing? One of the best ways to reduce risk is through diversification. Diversification is allocating your investing dollars into many different investments. For example if you were to buy 20 companies all 20 companies can go bankrupt and you can lose all you invested. You must also know how to manage your money well, by allocating your money into different investments, such as; stocks, bonds or other cash equivalents. • What would affect your decision to invest? The things that would affect your decision to invest can be how to keep the money invested based off of past market trending. You have to be able to tolerate the high risk factors that are associated with investing. You also have to decide whether you want to invest heavily into equities or debt or balance your portfolio. You will need to meet with a financial advisor to help you make better decisions.

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