Money Essentials

1. When you buy stock in a company:
    You are lending that company money.
    You own a piece of that company, and have a claim on its assets and earnings.
    You are guaranteed steady income for life that will at least keep pace with inflation.
2. On average, how much have stocks returned annually since the end of World War II?
    2%
    6%
    10%
    14%
3. Stocks can be divided into many different groups. Which of the following is a smart way to group stocks?
    By company size, as determined by market capitalization -- investors often talk about small-cap, large-cap, or mid-cap stocks.
    By sector -- various industrial sectors, such as technology, health care or utilities.
    By style -- for example, growth stocks, value stocks or cyclical stocks
    All of the above
4. Historically, small-cap stocks risen at a faster pace than large-cap stocks. So, naturally, small-caps should make up the bulk of your portfolio.
    True
    False
5. What's the key difference between growth stocks and value stocks?
    Growth stocks always rise more quickly than value stocks.
    Value stocks have below-average valuations, because company growth has matured.
    Growth stocks tend to show rapid increases in accounts receivable, while value stocks show more modest increases.
6. How should you use a stock's P/E ratio?
    You should use it to decide whether to buy or sell a particular stock.
    You should use it as a gauge, to estimate whether a stock is overvalued or undervalued.
    You should use it to determine the value of cyclical stocks.
    The P/E is meaningless and should be ignored.
7. A PEG ratio is derived by dividing a stock's price/earnings ratio by the company's projected earnings growth. What does the PEG tell you?
    The PEG ratio helps you predict whether a company will beat or miss earnings estimates in the following quarter.
    The PEG helps you gauge whether a stock is reasonable price, given its growth rate.
    The PEG predicts whether a stock with outperform the market.
8. To create a well-balanced stock portfolio intended for long-term growth, you should include:
    Stocks from several different industries.
    Mostly big, financially strong companies with above-average earnings growth.
    Stocks you can hold for a long time.
    All of the above.
9. If you place a limit order to buy a particular stock, what exactly do you want?
    To buy a limited number of shares.
    To buy at a particular price -- if the stock dips down to that price, your order will be filled.
    To hold shares of the stock for a limited amount of time, then sell.
    To buy shares at any price.
10. Which of these is NOT a type of stockbroker?
    Full-service broker.
    Online broker.
    Stock realtor.
    Discount broker.