Stocks Quiz

1.  Companies like their stocks to go up in value because:

(A) They make more money when the stock is at a higher price. (B) Part of their profits comes from the value of their stock.

(C) The higher the price of their shares, the more likely they are to make higher profits that year.

(D)  All of the above

(E)  None of the above.

2.  If you own a share of stock, you:

(A) Own part of the company that issued the stock

(B)  Have the right to vote if another company wants to buy the company whose stock you own. (C)  Might receive a check every year that represents your share in the company’s profits.

(D) All of the above

(E)  None of the above.

3.  A stock is to a mutual fund as:

(A) A blind squirrel is to an acorn. (B) One egg is to a dozen.

(C) A tree is to a forest.

(D) The pitcher is to a baseball team.

4.  You are an enterprising high school student. You inherit $10,000 and want to use it to pay for your college education starting in a little over two years.  You can’t afford to lose money, but you need more for college. Should you:

(A)  Invest in the safest blue chip stocks since they will probably be worth a lot more in two years. (B) Avoid the stock market since two years is too long of a time to invest.

(C)  Avoid the stock market since two years is too short of a time to invest.

(D) Find a broker so good he promises to increase your investment by 50% in time for college.

5.  You discover your great-great--grandfather named you in his will.  The good news is that he left you stock in Coca-Cola. The bad news is that it is only one share he bought in 1919 (ten years before the Great Depression) for $40.  How much is that share worth now?

(A)  Nearly 1.8 million dollars.

(B)  Barely enough to buy a year’s worth of Diet Cherry Coke. (C)  Nearly 7 million dollars.

(D)  It has increased a hundredfold and is now worth $4,000.

6. Which of these has the most effect on the price of a stock:

(A) The opinion of investors about the future chances for the company. (B) The general state of the economy.

(C) The performance of the stock market in general.

(D)  How much the company earns in profits

7.  You read that the Dow Jones Industrial average has gone down 500 points in the last two weeks. What does this mean to you as an investor:

(A)  It’s time to sell since prices are headed the wrong direction. (B)  Nothing, since you did not invest in Dow Jones.

(C)  Stocks that are part of the average are now cheaper to buy.

(D)  Such a major fall in the index indicates serious problems for the economy.

8.  The efficient market theory states that:

(A) You can make money in stocks, but are unlikely to “beat the market.”

(B) The market is so efficient that only professional stock traders and brokers can make money over the long term.

(C)  Information about companies is available to everyone so that it is now nearly impossible to actually

“make money” in the stock market.

(D)  You can make money in stocks but most of that is taken away by broker fees, commissions, and sales charges.

9.  If a company listed on the New York Stock Exchange makes a profit it:

(A) Must declare a dividend payable to its shareholders during that year.

(B)  Can pay a dividend with the profits or plow the money back into the company to make more profits. (C)  Must pay dividends unless it receives shareholder approval to use the profit for other purposes.

(D)  Increases the value of the stock by the amount of the dividend.

(E)  Insures that the price of its stock does not drop in value.

10. When you buy a share of stock, the money you pay for it is:

(A)  Divided among the stock market, the broker, and the company who issued the stock.

(B) Sent directly to the company in which you invested (after subtracting brokerage fees) for whatever business use it sees fit.

(C)  Is sent to the company but how it is used is carefully regulated by the Securities and Exchange

Commission.

(D) Goes (after subtracting brokerage fees) to some other person who wants to sell the stock.

Quiz Answer Key

1. E — None of the above. The price of a stock is what the last person who bought it paid.  If the next person to buy a stock pays more, the price goes up. This movement is NOT tied to profits.  Companies who earn no profits can see their stock rise while others with profits see their stock price decline.  The price of a stock is an opinion about its future.

2.  D—All of the above.  Companies that sell stock are owned by the shareholders.  Shareholders have a right to vote and will receive dividends.  Companies do NOT have an obligation to pay dividends.

3. C—A stock is to a mutual fund as a tree is to a forest.  B is incorrect because all the eggs are the same while all the shares in the portfolio of a mutual fund are not the same.  Plus, if you take one egg away you no longer have a dozen.  D is not correct because you cannot have a baseball game without a pitcher, you can have a mutual fund without a given stock.  C is correct since removing a tree still leaves a forest.  In fact, a diversity of stocks makes for a healthy fund portfolio just as a diversity of trees makes for a forest more likely to survive.

4. C—Avoid the stock market since two years is too short of a time to invest what  must be used in two years to pay for something important.  Stock market investing is for long term goals.  After two years even a well- planned investment might be worth less.

5.  C—Nearly seven million dollars. This question is designed to illustrate the tremendous potential of stocks as a wealth builder. That single share would have split many times and today be 100,000+ shares.

6. A—The opinion of investors about the future chances for the company.  The other choices certainly

influence stocks, but the value of any given stock is the opinion of investors about its future.  The economy can be dreadful, and the company earning no profits at all yet see its stock soar in value.

7. C—Stocks that are part of the average are now cheaper to buy. The Dow Jones average uses a handful of stocks — it is NOT the entire stock market.

8. A—You can make money in stocks, but are unlikely to “beat the market.”  C is close, but many long term investors do “make money” in stocks.

9. B—Can pay a dividend with the profits or plow the money back into the company to make more profits. “Growth stocks” take the latter approach while typically older, “blue chip” stocks take the former.  Such a clear distinction is no longer true, but note that although any dividends must be paid to shareholders, there is no obligation to declare dividends.

10.  C—Money paid for a stock goes (less broke fees) to a person who agrees to sell the stock.  Note that stocks are bought from people who already own them.  The only exception is the first offering (Initial Public Offering) used to raise money.

Companies do like to see the value of their stock increase, but not because they “make money” on sales at higher prices.  Companies make money selling goods or services, not by selling stocks.