Investor Knowledge Quiz: A Helpful Guide To Learning More About Investing

Investor Knowledge Quiz
A 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 Americas 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 Americas financial systemby
enforcing high ethical standards, bringing
the necessary resources and expertise
to regulation and enhancing investor
safeguards and market integrityall at
no cost to taxpayers.
FINRAs 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
1
FINRA
Investor Knowledge Quiz
How 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 companys stock
a) You own a part of the company
b) You have lent money to the company
c) You are liable for the companys debts
d) The company will return your original
investment to you with interest
e) Dont know/Not sure
2. If you buy a companys bond
d) You can vote on shareholder resolutions
3. Which type of bond is the safest?
a) U.S. Treasury bond
b) Municipal bond
c) Corporate bond
d) Dont know/Not sure
4. In general, if interest rates go down, then
bond prices
a) Go down
b) Go up
c) Are not affected
2
5. Which of the following is the best denition for
a junk bond?
a) A bond that is rated as below investment-
grade by rating agencies
b) A bond that has declined dramatically in
value
c) A bond that has defaulted
d) A bond that is not regulated
6. A no-load mutual fund is one that
a) Carries no fees
b) Carries no sales charge
c) Does not contain high-risk securities
d) Has no limits on the period of time in
which it can be bought or sold
7. In general, investments that are riskier tend
to provide higher returns over time than
investments with less risk.
a) True
b) False
c) Dont know/Not sure
8. Which of the following organizations insures
you against your losses in the stock market?
a) FDIC (Federal Deposit Insurance Corporation)
b) FINRA (Financial Industry Regulatory
Authority)
c) SEC (Securities and Exchange Commission)
d) SIPC (Securities Investor Protection
Corporation)
e) None of the above
f ) Dont know/Not sure
3
9. If a company les for bankruptcy, which of the
following securities is most at risk of becoming
virtually worthless?
a) The companys preferred stock
b) The companys common stock
c) The companys bonds
10. Which of the following best explains why many
municipal bonds pay lower yields than other
government bonds?
a) Municipal bonds are lower risk
b) There is a greater demand for municipal
bonds
c) Municipal bonds can be tax-free
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) $500
b) $250
c) 0
12. Which is the best denition of selling short?
a) Selling shares of a stock shortly after buying it
b) Selling shares of a stock before it has reached
its peak
c) Selling shares of a stock at a loss
d) Selling borrowed shares of a stock
4
13. Hedge funds are always subject to the same rules
and regulations as mutual funds.
a) True
b) False
14. The principal difference between mutual fund
share classes (Class A, Class B, Class C, etc.) is:
a) The different investments each class makes
b) The different fees and expenses each class
charges
c) The different investment advisers in charge
of managing each class
15. A Section 529 Plan is a tax-advantaged way to
save for:
a) College
b) Retirement
c) Long-term health care
5
Answers
1. If you buy a companys stock
d) The company will return your original
investment to you with interest
The correct answer is a:
Stocks are known as equities because each stock
share represents a small percentage of ownership
in the company, entitling the shareholder to vote
in the election of directors and on other matters
taken up at shareholder meetings or by proxy.
2. If you buy a companys bond
d) You can vote on shareholder resolutions
The correct answer is b:
Bonds are loans that investors make to a
corporation or a government body in exchange
for regular interest payments and the return of
principal at a future date.
Companies issue corporate bonds to raise
money for capital expenditures, operations and
acquisitions. But unlike stockholders, bondholders
dont receive ownership rights in the corporation.
6
3. Which type of bond is the safest?
a) U.S. Treasury bond
b) Municipal bond
c) Corporate bond
Treasuries are issued by the federal
government. Unlike corporate or municipal bonds,
they are backed by the full faith and credit of
the U.S. government, which guarantees that
interest payments will always be made and the
bonds redeemed at maturity.
4. In general, if interest rates go down, then
bond prices
a) Go down
b) Go up
c) Are not affected
The cardinal rule of bonds: When interest rates
fall, bond prices rise, and when interest rates
rise, bond prices fall. This is because as interest
rates go up, newer bonds come to market paying
higher interest yields than older bonds already in
the hands of investors, making the older bonds
worth less.
5. Which of the following is the best denition for
a junk bond?
a) A bond that is rated as below
investment-grade by rating agencies
b) A bond that has declined dramatically in
value
c) A bond that has defaulted
d) A bond that is not regulated
7
Junk or high-yield bonds are issued by
companies with poor credit ratings, meaning that
compared with better-rated investment-grade
bonds, the risk is greater that these companies
will default on their interest payments or even go
bankrupt and be unable to redeem their bonds
when they mature. To attract investors, junk
bonds pay higher yields than higher-graded
corporate bonds.
6. A no-load mutual fund is one that
a) Carries no fees
b) Carries no sales charge
c) Does not contain high-risk securities
d) Has no limits on the period of time in
which it can be bought or sold
Not all mutual funds charge sales loads. Called
no-load funds, these funds do not charge a front-
end sales charge or a deferred sales charge, such
as a Contingent Deferred Sales Charge (CDSC). In
addition, the funds 12b-1 fees must not exceed
0.25 percent of the funds average annual net
assets in order to call itself a no-load fund.
No-load funds can be purchased directly from
a mutual fund company or brokerage rm fund
supermarket, but you wont receive the assistance
of a broker or investment professional. For those
wanting professional advice, no-load funds also
may be purchased through an investment adviser
or broker, but youll typically pay a fee for this
advice. This means you will be paying a fee on top
of the underlying mutual fund expenses.
8
7. In general, investments that are riskier tend
to provide higher returns over time than
investments with less risk.
a) True
b) False
The stock and bond markets tend to reward
risk-taking over the long term. This is called
the risk-reward tradeoff. Over the short term,
however, high-risk investments such as small-
company stocks can be extremely volatile.
The less willing you are to take that risk, the
more you may want to emphasize investments
that provide a regular return with less volatility,
such as short-term bonds.
8. Which of the following organizations insures
you against your losses in the stock market?
a) FDIC (Federal Deposit Insurance Corporation)
b) FINRA (Financial Industry Regulatory
Authority)
c) SEC (Securities and Exchange Commission)
d) SIPC (Securities Investor Protection
Corporation)
e) None of the above
f ) Dont know/Not sure
The correct answer is e:
When you invest in stocks, you accept the risk
that your investment may decline as well as rise
in value. A primary role of securities regulators
such as FINRA and the SEC is to ensure that
securities laws and regulations are followed and
to punish violators.
The FDIC generally insures checking, savings and
other deposit accounts when an FDIC-regulated
bank fails.
9
The mission of the Securities Investor Protection
Corporation (SIPC) is to return funds and
securities to investors if the brokerage rm
holding these assets becomes insolvent.
9. If a company les for bankruptcy, which of the
following securities is most at risk of becoming
virtually worthless?
a) The companys preferred stock
b) The companys common stock
c) The companys bonds
Among those with claims to a bankrupt
companys assets, shareholders of common
stock have the last claim on any assets, falling
in line behind secured creditors, bondholders
and owners of preferred shares. Common
shareholders may not receive anything if the
secured and unsecured creditors claims are not
fully repaid.
10. Which of the following best explains why many
municipal bonds pay lower yields than other
government bonds?
a) Municipal bonds are lower risk
b) There is a greater demand for municipal
bonds
c) Municipal bonds can be tax-free
The correct answer is c:
Because dividend payments from municipal
bonds are usually exempt from federal
income tax, even with lower yields than other
government bonds, their after-tax rates of return
are attractive to investors in higher tax brackets.
10
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) $500
b) $250
c) 0
The correct answer is c:
When you buy stock on margin, you risk losing
your entire investmentor much more. In this
example, an investor used $500 to buy $1,000
worth of stock, borrowing the additional $500
from a brokerage rm to make the purchase.
When the stock was sold after dropping 50
percent in value, its remaining worth was only
$500the same amount the investor still owed
to the brokerage rm for the margin loan.
12. Which is the best denition of selling short?
a) Selling shares of a stock shortly after buying it
b) Selling shares of a stock before it has reached
its peak
c) Selling shares of a stock at a loss
d) Selling borrowed shares of a stock
The correct answer is d:
Short selling involves borrowing stock from a
broker through a margin account and selling
it, with the understanding that it must later be
bought back and returned to the broker.
If the stock declines in value, as the short seller
hopes, the investor will prot since the value of
the stock borrowed and sold would be higher
than the stock subsequently purchased and
returned to the broker. However, if the stock rises
in value, the investor must pay the difference to
make good on the stock owed to the broker.
11
13. Hedge funds are always subject to the same rules
and regulations as mutual funds.
a) True
b) False
Hedge funds are basically private investment
pools. Because they are usually only open
to limited numbers of wealthy, nancially
sophisticated investors and do not advertise or
publicly offer their securities, private hedge funds
are usually not required to register with the SEC.
As a result, unregistered private hedge funds do
not provide many of the investor protections that
apply to registered investment products, such as
mutual funds.
For example, hedge funds generally are not
subject to numerous mutual fund rules, such as
regulations requiring a certain degree of liquidity,
limiting how much can be invested in any one
investment and protecting against conicts of
interests.
14. The principal difference between mutual fund
share classes (Class A, Class B, Class C, etc.) is:
a) The different investments each class makes
b) The different fees and expenses each
class charges
c) The different investment advisers in charge
of managing each class
A single mutual fund, with one portfolio and
one investment adviser, may offer more than
one class of its shares to investors. Each class
represents a similar interest in the mutual funds
portfolio.
12
The principal difference between the classes is
that the mutual fund will charge you different
fees and expenses, depending on the class that
you choose. If you are thinking about choosing
a mutual fund with more than one class, it is
important for you to understand the differences
between them.
15. A Section 529 Plan is a tax-advantaged way
to save for:
a) College
b) Retirement
c) Long-term health care
Named after the section of the federal tax code
that governs them, Section 529 plans are tax-
advantaged programs that help families save
for college.
13
FINRA
Investor Resources
FINRA BrokerCheckCheck the background of an
investment professional or a rm.
Website: www.finra.org/brokercheck
Toll-free: (800) 289-9999
FINRA Investor InformationInvestor Alerts, tools and
much more to help you invest smarter and safer.
Investor Alerts Smart Bond Investing
Smart Saving for College Smart 401(k) Investing
Fund Analyzer Financial Calculators
Website: www.finra.org/investor
Phone: (202) 728-6964
FINRA Market DataData on equities, options, mutual
funds and a wide range of bonds, including real-time
corporate bond prices and FINRA-Bloomberg Bond Indices.
Website: www.finra.org/marketdata
FINRA Investor Complaint CenterIf you feel youve
been treated unfairly.
FINRA Investor Complaint Center
9509 Key West Avenue
Rockville, MD 20850-3329
Website: www.finra.org/complaint
Fax: (866) 397-3290
FINRA Dispute ResolutionIf you seek to recover
damages.
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, NY 10006
Website: www.finra.org/ArbitrationMediation
Phone: (212) 858-4400
Fax: (212) 858-4429
More Information:
To receive the latest Investor Alerts and other important
investor information sign up for Investor News at
www.finra.org.
Investor protection. Market integrity.
1735 K Street, NW
Washington, DC 20006-1506
www.nra.org
2012 FINRA. All rights reserved.
FINRA and other trademarks of
the Financial Industry Regulatory
Authority, Inc. may not be used
without permission.
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A helpful guide to learning more about investing.

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