Monday quiz
Test your investment knowledge with our quick and easy Monday quiz - this week's focus is on terminology...
a) Closed-ended will only trade for a finite period, usually 1, 3 or 5 years, while OEICs will be available to investors infinitely
b) Closed-ended have a finite number of shares, while OEICs are able to increase the number of shares held and issue shares directly to investors
c) Closed-ended only invest in UK-domiciled equities, while OEICs can contain stocks from anywhere in the World.
Answer: b) Closed-ended funds, such as investment trusts, have a finite number of shares, which are traded on the London Stock Exchange with prices rising or falling depending on investor sentiment, hence they can be bought either at a discount or premium to the net asset value (NAV). An OEIC is a collective investment that takes its structure from both a unit trust and an investment trust – it is single-priced (the asset value is the price) and issues shares like an investment trust. However, rather than buying and selling shares on a stock exchange, the investors transact with the fund company.
2. When deciding whether to buy into a company’s stock, you should
focus your research on:
a) The company’s balance sheet, income statement, cash flow and any
other information you can get your hands on
b) The company’s balance sheet is enough to base a decision on
c) The company’s dividend payment history
Answer: a) Knowledge is, after all, power and the more information you have the better the decision you are likely to make. A company’s balance sheet tells investors how much money the company has, how much it owes, and what is left for the shareholders; the income statement is a record of the company's profitability; and the cash flow statement essentially shows where the company’s money is spent. In addition to these three records of accounts, investors should look at a stock’s past performance – remembering that this is no guarantee of future performance, the company’s strategy and outlook, the outlook for its sector and the economy as a whole, and the company’s management record – just as investors in funds would research the track record of any given fund manager.
3. Is it better to be an investor or a speculator?
a) An investor: education, education, education
b) A speculator: you have to speculate to accumulate
c) Neither: my money is better off under the mattress
Answer: a) Although in the current market environment you could be forgiven for thinking c) is the best option, in general the more research you carry out into any stocks or funds that you plan on investing in, the better. Speculation itself is not necessarily a vice, but its participants must be willing to accept that they risk losing everything they invest if this is their decision-making strategy.
You can check your terminology or discover the meaning of unknown investment-related terms at Morningstar’s Glossary.
