Monday quiz
Start the week with a quick test of your investment knowledge: today's quiz focuses on equity markets
a) Stocks
b) Bonds
c) Futures
d) Precious metals
Answer: b) Bonds. Previously-owned bonds traded on an open market will increase in value as interest rates fall and decrease in value as interest rates rise: they are inversely related. However, if you plan to hold the bond to maturity, its value does not change with interest rates as you will still get the amount promised when you bought the bond, all other things being equal. If, on the other hand, you plan to own bonds for investment purposes—that is to buy and sell as you would equities—then interest rates are very important.
2. What does a bear market mean?
a) The market is up
b) The market has stayed the same over a long period of time
c) The market is down
d) The market has repeated a past pattern
Answer: c) The market is down. A bear market is a steady drop in the stock market over a period of time, accompanied by widespread pessimism. Although there is no agreed-upon definition of a bear market, it is generally accepted to be a drop of 20% or more over a time frame of at least two months.
3. What is a blue-chip?
a) A high grade quality stock with a long history of earnings growth and
dividend payments in both good times and bad
b) A stock whose sales and earnings expand faster than the
c) A stock that pays higher than average returns
d) A stock that is not currently paying high dividends but is relatively inexpensive and expected to produce good returns in the future
Answer: a) A large, high grade quality company with a long history of earnings growth and dividend payments, reliable management and a strong credit rating. In the UK, most blue-chips stocks are traded on the FTSE 100 index, although the term ‘blue-chip’ has more generally come to mean anything of very high quality.
4. What is short-selling?
a) Buying shares in the morning and selling them before the close of
business on the same day
b) Borrowing shares, selling them and buying them back for less money after the price has fallen
c) Buying a small quantity of shares
d) Continuously selling shares after holding them for short periods of time
Answer: b) Borrowing shares, selling them and buying them back for less money after the price has fallen. Short selling was banned in the UK last year this year as the technique was held partly to blame for undermining confidence in the mortgage lender HBOS and exaggerating falls in the financial sector as a whole. The ban was lifted in early 2009. In brief, short selling allows investors to make money from falling share prices.
5. Which of the following is not a characteristic of a common stock?
a) Ownership
b) Dividends
c) Capital gains
d) Guaranteed returns
Answer: d) guaranteed returns. Returns are never guaranteed and past performance is no guarantee of future performance. In order to spread your risk it is highly recommended you diversify your portfolio, dividing your investments between different asset classes including equities, funds, bonds, and cash.
