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Investor Knowledge QuizA helpful guide to learning more about investing.
FINRA and Investor Education
FINRA, the Financial Industry Regulatory Authority, is an independent, not-for-profit organization with a public mission: to protect America’s investors by making sure the securities industry operates fairly and honestly. We do that by writing and enforcing rules governing the activities of nearly 4,400 brokerage firms with approximately 630,000 brokers; examining firms for compliance with those rules; fostering market transparency; and educating investors.
Our independent regulation plays a critical role in America’s financial system—by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity—all at no cost to taxpayers.
FINRA’s commitment to protect investors extends beyond strong enforcement. We believe that investor education is often the best form of investor protection. To that end, we provide free, unbiased education resources and tools to help investors evaluate investment products and professionals, and better understand the markets and the principles of investing.
www.finra.org
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FINRAInvestor Knowledge QuizHow much do you really know about investing? Take this short quiz and test your knowledge. Answers are on page 5.
1. If you buy a company’s stock…
a) Youownapartofthecompanyb) Youhavelentmoneytothecompanyc) Youareliableforthecompany’sdebtsd) Thecompanywillreturnyouroriginal
investmenttoyouwithintereste) Don’tknow/Notsure
2. If you buy a company’s bond…
a) Youownapartofthecompanyb) Youhavelentmoneytothecompanyc) Youareliableforthecompany’sdebtsd) Youcanvoteonshareholderresolutionse) Don’tknow/Notsure
3. Which type of bond is the safest?
a) U.S.Treasurybondb) Municipalbondc) Corporatebondd) Don’tknow/Notsure
4. In general, if interest rates go down, then bond prices…
a) Godownb) Goupc) Arenotaffectedd) Don’tknow/Notsure
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5. Which of the following is the best definition for a “junk bond?”
a) Abondthatisratedas“belowinvestment-grade”byratingagencies
b) Abondthathasdeclineddramaticallyinvalue
c) Abondthathasdefaultedd) Abondthatisnotregulatede) Don’tknow/Notsure
6. A “no-load” mutual fund is one that…
a) Carriesnofeesb) Carriesnosaleschargec) Doesnotcontainhigh-risksecuritiesd) Hasnolimitsontheperiodoftimein
whichitcanbeboughtorsolde) Don’tknow/Notsure
7. In general, investments that are riskier tend to provide higher returns over time than investments with less risk.
a) Trueb) Falsec) Don’tknow/Notsure
8. Which of the following organizations insures you against your losses in the stock market?
a) FDIC(FederalDepositInsuranceCorporation)b) FINRA(FinancialIndustryRegulatory
Authority)c) SEC(SecuritiesandExchangeCommission)d) SIPC(SecuritiesInvestorProtection
Corporation)e) Noneoftheabovef ) Don’tknow/Notsure
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9. If a company files for bankruptcy, which of the following securities is most at risk of becoming virtually worthless?
a) Thecompany’spreferredstockb) Thecompany’scommonstockc) Thecompany’sbondsd) Don’tknow/Notsure
10. Which of the following best explains why many municipal bonds pay lower yields than other government bonds?
a) Municipalbondsarelowerriskb) Thereisagreaterdemandformunicipal
bondsc) Municipalbondscanbetax-freed) Don’tknow/Notsure
11. You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50 percent. You sell it. Approximately how much of your original $500 investment are you left with in the end?
a) $500b) $250c) 0d) Don’tknow/Notsure
12. Which is the best definition of “selling short?”
a) Sellingsharesofastockshortlyafterbuyingitb) Sellingsharesofastockbeforeithasreached
itspeakc) Sellingsharesofastockatalossd) Sellingborrowedsharesofastocke) Don’tknow/Notsure
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13. Hedge funds are always subject to the same rules and regulations as mutual funds.
a) Trueb) Falsec) Don’tknow/Notsure
14. The principal difference between mutual fund share classes (Class A, Class B, Class C, etc.) is:
a) Thedifferentinvestmentseachclassmakesb) Thedifferentfeesandexpenseseachclass
chargesc) Thedifferentinvestmentadvisersincharge
ofmanagingeachclassd) Don’tknow/Notsure
15. A Section 529 Plan is a tax-advantaged way to save for:
a) Collegeb) Retirementc) Long-termhealthcared) Don’tknow/Notsure
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Answers
1. If you buy a company’s stock…
a) You own a part of the companyb) Youhavelentmoneytothecompanyc) Youareliableforthecompany’sdebtsd) Thecompanywillreturnyouroriginal
investmenttoyouwithintereste) Don’tknow/Notsure
The correct answer is a:
Stocksareknownas“equities”becauseeachstocksharerepresentsasmallpercentageofownershipinthecompany,entitlingtheshareholdertovoteintheelectionofdirectorsandonothermatterstakenupatshareholdermeetingsorbyproxy.
2. If you buy a company’s bond…
a) Youownapartofthecompanyb) You have lent money to the companyc) Youareliableforthecompany’sdebtsd) Youcanvoteonshareholderresolutionse) Don’tknow/Notsure
The correct answer is b:
Bondsareloansthatinvestorsmaketoacorporationoragovernmentbodyinexchangeforregularinterestpaymentsandthereturnofprincipalatafuturedate.
Companiesissuecorporatebondstoraisemoneyforcapitalexpenditures,operationsandacquisitions.Butunlikestockholders,bondholdersdon’treceiveownershiprightsinthecorporation.
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3. Which type of bond is the safest?
a) U.S. Treasury bondb) Municipalbondc) Corporatebondd) Don’tknow/Notsure
The correct answer is a:
“Treasuries”areissuedbythefederalgovernment.Unlikecorporateormunicipalbonds,theyarebackedbythe“fullfaithandcredit”oftheU.S.government,whichguaranteesthatinterestpaymentswillalwaysbemadeandthebondsredeemedatmaturity.
4. In general, if interest rates go down, then bond prices…
a) Godownb) Go upc) Arenotaffectedd) Don’tknow/Notsure
The correct answer is b:
Thecardinalruleofbonds:Wheninterestratesfall,bondpricesrise,andwheninterestratesrise,bondpricesfall.Thisisbecauseasinterestratesgoup,newerbondscometomarketpayinghigherinterestyieldsthanolderbondsalreadyinthehandsofinvestors,makingtheolderbondsworthless.
5. Which of the following is the best definition for a “junk bond?”
a) A bond that is rated as “below investment-grade” by rating agencies
b) Abondthathasdeclineddramaticallyinvalue
c) Abondthathasdefaultedd) Abondthatisnotregulatede) Don’tknow/Notsure
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The correct answer is a:
“Junk”or“high-yield”bondsareissuedbycompanieswithpoorcreditratings,meaningthatcomparedwithbetter-rated“investment-grade”bonds,theriskisgreaterthatthesecompanieswilldefaultontheirinterestpaymentsorevengobankruptandbeunabletoredeemtheirbondswhentheymature.Toattractinvestors,“junk”bondspayhigheryieldsthanhigher-gradedcorporatebonds.
6. A “no-load” mutual fund is one that…
a) Carriesnofeesb) Carries no sales chargec) Doesnotcontainhigh-risksecuritiesd) Hasnolimitsontheperiodoftimein
whichitcanbeboughtorsolde) Don’tknow/Notsure
The correct answer is b:
Notallmutualfundschargesalesloads.Calledno-loadfunds,thesefundsdonotchargeafront-endsaleschargeoradeferredsalescharge,suchasaContingentDeferredSalesCharge(CDSC).Inaddition,thefund’s12b-1feesmustnotexceed0.25percentofthefund’saverageannualnetassetsinordertocallitselfano-loadfund.
No-loadfundscanbepurchaseddirectlyfromamutualfundcompanyorbrokeragefirmfundsupermarket,butyouwon’treceivetheassistanceofabrokerorinvestmentprofessional.Forthosewantingprofessionaladvice,no-loadfundsalsomaybepurchasedthroughaninvestmentadviserorbroker,butyou’lltypicallypayafeeforthisadvice.Thismeansyouwillbepayingafeeontopoftheunderlyingmutualfundexpenses.
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7. In general, investments that are riskier tend to provide higher returns over time than investments with less risk.
a) Trueb) Falsec) Don’tknow/Notsure
The correct answer is a:
Thestockandbondmarketstendtorewardrisk-takingoverthelongterm.Thisiscalledtherisk-rewardtradeoff.Overtheshortterm,however,high-riskinvestmentssuchassmall-companystockscanbeextremelyvolatile.Thelesswillingyouaretotakethatrisk,themoreyoumaywanttoemphasizeinvestmentsthatprovidearegularreturnwithlessvolatility,suchasshort-termbonds.
8. Which of the following organizations insures you against your losses in the stock market?
a) FDIC(FederalDepositInsuranceCorporation)b) FINRA(FinancialIndustryRegulatory
Authority)c) SEC(SecuritiesandExchangeCommission)d) SIPC(SecuritiesInvestorProtection
Corporation)e) None of the abovef ) Don’tknow/Notsure
The correct answer is e:
Whenyouinvestinstocks,youaccepttheriskthatyourinvestmentmaydeclineaswellasriseinvalue.AprimaryroleofsecuritiesregulatorssuchasFINRAandtheSECistoensurethatsecuritieslawsandregulationsarefollowedandtopunishviolators.
TheFDICgenerallyinsureschecking,savingsandotherdepositaccountswhenanFDIC-regulatedbankfails.
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ThemissionoftheSecuritiesInvestorProtectionCorporation(SIPC)istoreturnfundsandsecuritiestoinvestorsifthebrokeragefirmholdingtheseassetsbecomesinsolvent.
9. If a company files for bankruptcy, which of the following securities is most at risk of becoming virtually worthless?
a) Thecompany’spreferredstockb) The company’s common stockc) Thecompany’sbondsd) Don’tknow/Notsure
The correct answer is b:
Amongthosewithclaimstoabankruptcompany’sassets,shareholdersofcommonstockhavethelastclaimonanyassets,fallinginlinebehindsecuredcreditors,bondholdersandownersofpreferredshares.Commonshareholdersmaynotreceiveanythingifthesecuredandunsecuredcreditors’claimsarenotfullyrepaid.
10. Which of the following best explains why many municipal bonds pay lower yields than other government bonds?
a) Municipalbondsarelowerriskb) Thereisagreaterdemandformunicipal
bondsc) Municipal bonds can be tax-freed) Don’tknow/Notsure
The correct answer is c:
Becausedividendpaymentsfrommunicipalbondsareusuallyexemptfromfederalincometax,evenwithloweryieldsthanothergovernmentbonds,theirafter-taxratesofreturnareattractivetoinvestorsinhighertaxbrackets.
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11. You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50 percent. You sell it. Approximately how much of your original $500 investment are you left with in the end?
a) $500b) $250c) 0d) Don’tknow/Notsure
The correct answer is c:
Whenyoubuystockonmargin,yourisklosingyourentireinvestment—ormuchmore.Inthisexample,aninvestorused$500tobuy$1,000worthofstock,borrowingtheadditional$500fromabrokeragefirmtomakethepurchase.Whenthestockwassoldafterdropping50percentinvalue,itsremainingworthwasonly$500—thesameamounttheinvestorstillowedtothebrokeragefirmforthemarginloan.
12. Which is the best definition of “selling short?”
a) Sellingsharesofastockshortlyafterbuyingitb) Sellingsharesofastockbeforeithasreached
itspeakc) Sellingsharesofastockatalossd) Selling borrowed shares of a stocke) Don’tknow/Notsure
The correct answer is d:
Shortsellinginvolvesborrowingstockfromabrokerthroughamarginaccountandsellingit,withtheunderstandingthatitmustlaterbeboughtbackandreturnedtothebroker.
Ifthestockdeclinesinvalue,astheshortsellerhopes,theinvestorwillprofitsincethevalueofthestockborrowedandsoldwouldbehigherthanthestocksubsequentlypurchasedandreturnedtothebroker.However,ifthestockrisesinvalue,theinvestormustpaythedifferencetomakegoodonthestockowedtothebroker.
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13. Hedge funds are always subject to the same rules and regulations as mutual funds.
a) Trueb) Falsec) Don’tknow/Notsure
The correct answer is b:
Hedgefundsarebasicallyprivateinvestmentpools.Becausetheyareusuallyonlyopentolimitednumbersofwealthy,financiallysophisticatedinvestorsanddonotadvertiseorpubliclyoffertheirsecurities,privatehedgefundsareusuallynotrequiredtoregisterwiththeSEC.Asaresult,unregisteredprivatehedgefundsdonotprovidemanyoftheinvestorprotectionsthatapplytoregisteredinvestmentproducts,suchasmutualfunds.
Forexample,hedgefundsgenerallyarenotsubjecttonumerousmutualfundrules,suchasregulationsrequiringacertaindegreeofliquidity,limitinghowmuchcanbeinvestedinanyoneinvestmentandprotectingagainstconflictsofinterests.
14. The principal difference between mutual fund share classes (Class A, Class B, Class C, etc.) is:
a) Thedifferentinvestmentseachclassmakesb) The different fees and expenses each
class chargesc) Thedifferentinvestmentadvisersincharge
ofmanagingeachclassd) Don’tknow/Notsure
The correct answer is b:
Asinglemutualfund,withoneportfolioandoneinvestmentadviser,mayoffermorethanone“class”ofitssharestoinvestors.Eachclassrepresentsasimilarinterestinthemutualfund’sportfolio.
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Theprincipaldifferencebetweentheclassesisthatthemutualfundwillchargeyoudifferentfeesandexpenses,dependingontheclassthatyouchoose.Ifyouarethinkingaboutchoosingamutualfundwithmorethanoneclass,itisimportantforyoutounderstandthedifferencesbetweenthem.
15. A Section 529 Plan is a tax-advantaged way to save for:
a) Collegeb) Retirementc) Long-termhealthcared) Don’tknow/Notsure
The correct answer is a:
Namedafterthesectionofthefederaltaxcodethatgovernsthem,Section529plansaretax-advantagedprogramsthathelpfamiliessaveforcollege.
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