Investing
What is the largest equities market in the world?
New York Stock Exchange (NYSE) Reason: The largest of these markets is the New York Stock Exchange. It was founded in 1792 under a tree on Wall Street. Also known as the "Big Board" and "the Exchange." the NYSE has the most stringent listing requirements and is governed by a board of directors. Recent events have led the NYSE to develop and enforce stricter rules of corporate governance.
What is a "blue chip" stock?
they are huge companies with solid reputations// financially fit corporations with dependable earnings.
An investor bought 40 shares of ABC corporation's stock at $80 a share. Two weeks later, the investor receives notice that the corporation has approved a 2-for-1 stock split. Based on this information, the investor would own at the moment of the split
80 shares of the stock and the price of each share is $40 Reason: A stock split is when the existing stock divides into a larger number of shares and the price of each share is then reduced accordingly, i.e., a 2-for-1 split on 40 shares that is worth $80 would result in 80 shares at $40 at the time of the split. Among other reasons, companies often decide to declare a stock split when they want to bring in more investors and do not want to issue more stock. Or, they believe that by bringing down the price of the stock through a stock split, that they will increase activity and interest in the corporation?s stock
When a corporation or government agency borrows money from an investor and pays interest and principal to that same investor, it is a:
Bond Reason: bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer, but no corporate ownership privileges, as stockholders do.
Carmen sold her stock in ABC company for a higher price per share than she bought it for. She realized a:
Capital gain Reason: The profit, if any, a shareholder makes when selling stock is called a capital gain. If the sale price is less than the purchase price, the investor realizes a capital loss. Sale price - purchase price = capital gain or loss.
David bought stock for $4,000 and one year later he sold it for $1,000. The sale resulted in a:
Capital loss Reason: Chris had a $3,000 capital loss ($4,000 - $1,000 = $3,000) from selling his stock. A capital loss is the decrease in the value of assets between the purchase and sale date. If the value of the asset increased, the seller incurred a capital gain. In most instances, the investor pays income tax on the capital gain. The tax rate, however, is lower if the stock has been held for at least 12 months.
The price of a security may be affected by:
Current events Reason: Current events (for example, a war or major oil spill), investor confidence, and interest rate levels can all affect the financial markets in general as well as a specific company's stock or bond prices. Diversification is an investing technique that can affect the value of an investor's portfolio but not the price of securities.
A Dante Oil Corporation tanker collided with another ship causing a major oil spill that will destroy the environment in the area for years and will cost billions for cleanup. The price of Dante is likely to:
Decrease Reason: The price of Dante Oil Corporation stock is likely to go down in value for several reasons. Investors will probably believe that: 1) the cost of the cleanup will decrease the company's profits and therefore reduce or eliminate dividends in the near future; 2) the company will incur large legal fees; and/or 3) the company may be charged with large fines or penalties. All of these factors will make investors less confident in Dante's future and less likely to want to purchase Dante Oil stock, so the market value is likely to go down.
Shares of stock are also known as:
Equities Reason: Common stocks are also known as equities. When investors buy stock, they become part owners of that company, and their ownership of the stock is known as equity (ownership) investment.
If a business wants to raise capital but not create debt, it can:
Issue common stock Reason: A company raises capital (money) when it issues stock. Since the corporation has not obligation to pay stockholders back the price of the stock, issuing stock does not create a debt, as does issuing bonds or borrowing money from a financial institution or the government.
Matthew and Alicia just had a baby. They received money as baby gifts and want to put it away for the baby's college tuition. Which of the following has the lowest potential growth rate over the next 18 years?
Savings accounts Reason: Stocks have the highest potential growth rate and the highest risk of loss. Savings accounts have low interest rates and the lowest potential growth rate. Both savings and checking accounts are safe because they are FDIC insured up to $100,000 per individual at one institution. Bonds have a much lower potential growth rate than stocks, and there is less risk that the bondholder will not receive the bonds face value on maturity date.
A pharmacy is to drugs as the American Stock Exchange is to:
Securities Reason: A pharmacy, run by a licensed pharmacist, is authorized by a state government to fill prescription orders. A stock or bond exchange is where registered stockbrokers buy and sell securities such as stocks or bonds (fill orders) for investors. Exchanges are similar to other marketplaces in that the prices of the goods (equities) change based upon the basic laws of supply and demand
The federal agency that regulates the securities industry is the:
Securities and Exchange Commission Reason: The Securities and Exchange Commission (SEC) is the federal agency that protects the interests of investors by regulating companies that sell stocks or bonds (securities). The SEC requires these companies to publicly disclose honest and accurate information about their financial health. The SEC also oversees the activities of the stock exchanges, over the counter (OTC) market, investment advisers, and anyone else who is involved in the buying and selling of securities.
Before the Kiss Corporation can issue stocks or bonds, it must register the issue with:
The Securities and Exchange Commission (SEC) Reason: Before a company can raise capital by issuing stocks or bonds, it must register the stock or bond issue with the Securities and Exchange Commission (SEC). An investment banking firm assists the corporation in completing the registration forms and serves as an intermediary between the issuing corporation and the initial investors.
Buying a treasury bill (T-bill) is best for investors who are looking for
a secure, low risk investment. Reason: These bills are backed by the full faith and credit of the US government, therefore considered relatively risk free.
Using a brokerage firm, a qualified investor buys 1000 shares of a common stock at $50 a share on 50% margin. This means that the
brokerage firm is lending the investor 50% of the money Reason: Margin is a speculative method whereby an investor borrows up to 50% of the money needed from a brokerage firm in order to buy a wanted stock and pays a fee for the privilege.
Michele and Claudia have a seven year old son. They won $50,000 on a TV game show and want to put it away for their son's education. Which of the following has the highest potential growth and the highest risk?
common stocks Reason:Common stocks have the highest potential growth rate and the highest risk of loss. Savings accounts have low interest rates, while regular checking accounts do not earn interest. Both savings and checking accounts are safe because they are FDIC insured up to $100,000 per individual at one institution. Bonds have a much lower potential growth rate than stocks, and there is less risk that the bondholder will not receive the bonds face value on maturity date.
The interest earned on United States Series EE Savings Bonds is
exempt from state and local taxes. Reason: The interest rate on US savings bonds is exempt from state and local taxes.
A person owns a stock that pays a $2.00 a share dividend. If the person chooses to reinvest that dividend, this means that the $2.00 will go toward buying
more of the same stock. Reason: A dividend reinvestment plan is designed to help the shareholder acquire additional shares (or partial shares if there is not enough money) of the stock by immediately reinvesting the dividend in the same company?s stock as soon as the dividend is declared. The shareholder is still responsible for paying taxes on the dividends earned.
As an investment, a person decides to buy a small house that has three rental apartments. The profits from this investment may be lower than expected if...
one of the apartments is not rented. Reason: The investor regards the house as a small business. Any time that any apartment is not rented, the investor is losing income and therefore profits on the investment.
When is there high risk for a stock to become worthless?
the business that issued the stock is about to declare bankruptcy Reason: In recent years, the stock of many high-tech companies reached a very high price in a short period of time, then declined in value as the company failed, eventually declaring bankruptcy. A stock that trades for less than $1.00 is called a "penny stock." Investing in penny stocks is considered a high risk because there is a high chance that the issuing company may default.
