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Test answers for Stock Trading Test 2016

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1 Answered Test Questions:

1. For which of the following reasons are both fundamental and technical analyses criticized?

Answers:

• Because neither can accurately predict future stock price movements

• Because it is difficult to decide which one will help a person make more money

• Because the numbers needed are not readily available

• Because there are other strategies which work better


87 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
2. Which of the following would not be an example of managing risk?

Answers:

• Investing completely in a new biotech firm

• Diversifying an investment to ten different companies

• Purchasing three mutual funds

• Buying both stocks and bonds

3. Why is it important to write down trading goals?

Answers:

• So that they may become more real and not be forgotten

• So that you may be able to throw them out if you are unable to meet them

• So that you may be able to tell people you are a successful trader because you set goals

• So that you may be able to ensure success

4. Which of the following is a risk of trading stocks on a foreign stock exchange as compared to trading it domestically?

Answers:

• Growth rate risk

• Taxation risk

• Legal risk

• Exchange rate risk

5. What is meant by a "leading indicator"?

Answers:

• A market statistic which changes after a change in stock prices

• A report put out by the stock market

• Insider information

• A market statistic which typically indicates ahead of time what the market will do

6. What is the main advantage of a stop loss order?

Answers:

• It limits all risk.

• It protects the investor's profit without his having to monitor the stock price constantly.

• It limits an investor's profit.

• It creates opportunities for a straddle.

7. What would be the objective of a conservative trader's portfolio?

Answers:

• Short selling stocks

• Long term returns over time

• Risky trading

• Short term returns

8. What happens to an investment if risk is mitigated properly?

Answers:

• Nothing specific happens to any one investment; risk mitigation is an overall portfolio tool.

• The stocks you purchase are guaranteed to increase.

• It makes for a zero sum game, with no losses or profits.

• Risk is assigned to someone else.

9. Which of the following is a way to quantify the risk of a given security?

Answers:

• Looking at what peers think of the stock

• Using technical analysis

• Using fundamental analysis

• Calculating the probability and magnitude of potential loss

10. What is a good indicator of a stock being volatile?

Answers:

• The stock price has highs of $50 and lows of $35 in the previous year.

• The graph of the stock indicates it hits new highs and lows almost monthly.

• The management is not qualified.

• The stock does not declare dividends.

11. What is the purpose of using screening factors?

Answers:

• They help focus on a specific industry.

• They guarantee against any losses.

• They help investors decide when to exit an investment.

• They are preset criteria that any investment must meet before an investor will consider it a viable investment.

12. Which of the following would a fundamental analyst examine?

Answers:

• Managerial reviews

• Financial forecasts

• Company strategy plans

• Company financial statements

13. What is the "gap" trading strategy?

Answers:

• Trading a stock when its opening price is different from the previous day's closing price

• Trading stock in the company GAP

• Looking for consistent companies who return large dividends

• Buying and selling the same stock at different prices at the same moment

14. How often should a trader revaluate the holdings in their portfolios?

Answers:

• Daily

• Continuously, but not daily

• Yearly

• Never

15. What is meant by a "margin account"?

Answers:

• A stock account with a guaranteed margin return

• A type of stock which sells at a discount

• A type of account that can only trade options

• A type of stock trading account which essentially borrows money from the stock brokerage to purchase stocks

16. What is another name for a market cycle?

Answers:

• Market Nomination

• Economic Cycle

• Gap Cycle

• Straddle

17. What is the type of analysis conducted using past earnings, past stock prices, and other qualitative and quantitative facts about a company called?

Answers:

• Technical Analysis

• Valuation

• Break Even Analysis

• Fundamental Analysis

18. Why would an investor invest only in companies which have a history of paying dividends?

Answers:

• Because it creates an income stream

• Because it is a low risk investment

• Because it creates a return on investment

• All of the above

19. What strategy would an investor with a short time frame most likely use?

Answers:

• Buying mutual funds

• Buying certificates of deposit

• Investing in large blue chip stocks for the dividends

• Day trading

20. What is a "trailing stop" order?

Answers:

• An order in which an investor actively changes the stop loss price of the order based on current market prices

• A multi tiered stop loss order

• A stop order placed after the purchase of the underlying stock

• A stop order placed before buying the underlying stock

21. Which of the following would be a stock trading goal?

Answers:

• Making lots of money

• Earning 20% return on the invested capital within 1 year

• Trading only in bear markets

• Selling call options

22. Why would an investor not utilize a stock trading strategy?

Answers:

• Because they cost money

• Because of the belief that they do not work, and are a wasted effort

• Because not enough data available

• Because they are only for the wealthy

23. What do decreasing interest rates typically mean for the stock market?

Answers:

• Stock prices will decrease in general.

• Stock prices will increase in general.

• There will be no effect on stock prices at all.

• Drastic changes in stock prices will be witnessed but it is not possible to determine in which direction.

24. How can market cycles be utilized in trading stocks?

Answers:

• They offer no help in trading stocks.

• By indicating when to invest in bonds

• By recognizing the declines in the market when stocks can be purchased at a lower price

• By letting an investor know when to sell their IBM stock

25. What should a trader do if one portfolio is outperforming another?

Answers:

• Sell off all stock in the worst portfolio.

• Switch the portfolios around so they all have the same return.

• Depends on the goals of each portfolio; they could still all be meeting expectations.

• Do extensive analysis on the stocks.

26. Why should goals be changeable?

Answers:

• They should not be; they should be set only once.

• Because it allows people never to have to achieve them

• Lest you should forget your goals.

• So that you may be able to refine your goals on the basis of the progress you are making

27. What is meant by "stop loss order"?

Answers:

• A stock order to purchase a stock at a specific price

• An order to purchase a stock after it has lost a percentage

• An order placed at a price lower than the current price to liquidate a stock and maintain a profit

• An order to purchase a stock at a specific price

28. What would be the risk tolerance level of a retired government worker in general?

Answers:

• High

• Moderate

• Varies indefinitely

• Low

29. What are the obstacles to achieving stock trading goals?

Answers:

• The stock market itself

• Inability to trade on foreign exchanges

• A career as a stock broker

• People or things which will require the trader to maneuver around them to reach their goals

30. What would be the appropriate limit price for the following example: A stock is currently trading at $20, and the investor believes he can buy it for 10% less.

Answers:

• $18

• $20

• $22

• $17

31. Why is it important to recognize what stage of the market cycle a company is in?

Answers:

• Because companies are required by law to report the stage

• Because it helps decide whether to hire or fire employees

• Because it indicates what the potential growth/decline rate is going to be in the near term

• It is not important at all.

32. What factors does technical analysis primarily rely on?

Answers:

• Financial reports

• Management reports

• Past Price and volume

• Market indicators

33. Why would an investor use a limit order to buy?

Answers:

• Because they want to pay more than the current price

• Because they want to sell the stock in the future

• Because they want to purchase a certain stock at a price lower than its current price without constantly monitoring the stock price

• Because they want to limit their market risk

34. What is the primary goal of technical analysis?

Answers:

• Identifying trends to predict short term price movements

• Helping build a retirement plan

• Identifying stocks with potential for large increases in the next two years

• Finding indications of interest rate direction

35. Why would a trader liquidate a portfolio?

Answers:

• Because it is illegal to hold it too long

• To avoid being labeled as a day trader

• Because it has made too much money already

• Because he is no longer interested in the classification of stock

36. What is portfolio management?

Answers:

• Having a suite of investments to reach a goal while minimizing risk

• Buying shares all in one industry

• Actively trading stocks in your portfolio

• Selling securities which are not performing

37. What is meant by "technical analysis"?

Answers:

• An analysis which uses fundamental information about a company

• An analysis which is done on a stock after it is purchased

• An analysis technique which utilizes both qualitative and quantitative factors

• A stock price analysis technique using technical aspects of a stock

38. What market stage would a company focus on for increasing sales?

Answers:

• Growth

• Idea stage

• Decline

• Peak

39. Which of the following is not one of the cycles in the market?

Answers:

• Growth

• Idea stage

• Decline

• Rapid recession

40. How can a trader implement a goal always to earn 10% on stocks, and never to lose more than 2%?

Answers:

• By setting limit and stop loss orders on all transactions using those criteria

• By actively watching the stocks and try to judge when to sell

• BY using it as a loose guideline

• By asking their friends to keep them on track

41. What happens to a stop loss order when the trigger price is reached?

Answers:

• The order converts to a market order to sell.

• The seller is notified to log into their account to execute the order.

• The stock is purchased.

• An options contract is sold for the security at the trigger price.

42. What is the purpose of a stop loss order?

Answers:

• To set a purchase price on a stock

• To write an option contract at the trigger price

• To sell a stock at the purchase price before losing money

• To protect profits already made on a stock investment

43. What form of analysis would a "Value Investor" utilize to identify stock opportunities?

Answers:

• Fundamental Analysis

• Technical Analysis

• Capital Asset Pricing Model

• All of the above

44. When is the straddle trading strategy appropriate?

Answers:

• When the price may move by a small amount

• When an investor believes there will be a large decrease in stock prices

• When an investor believes there will be a large increase in stock prices

• When an investor believes there will be a large stock price movement, but does not know in which direction

45. Which of the following would be a good example of risk mitigation?

Answers:

• Purchasing only small cap stocks

• Purchasing stocks in three industries

• Purchasing stocks all in one industry

• Purchasing only blue chip stocks

46. What would a company at the peak of the business cycle consider doing?

Answers:

• Selling off the division

• Reworking the product or offering an additional product, as the current product is likely to start declining

• Spending on marketing to increase sales

• Hiring additional staff

47. What is a "speculative stock"?

Answers:

• A stock which has a proven track record for slow growth

• A stock which is high risk and has the potential for large returns or large losses

• A stock with a guaranteed return

• A stock which trades on the NASD

48. What is meant by "day trading"?

Answers:

• Trading during market hours

• Trading stocks on foreign markets

• Purchasing stocks and selling them on the same day

• Holding stocks for a short period of time, not more than a week

49. What is the duration of a market cycle?

Answers:

• One year

• Depends on the product, market, economic situation, and cannot be stated

• Limited to 10 years at the most

• Typically two years

50. What is meant by using the straddle stock trading strategy?

Answers:

• Selling a call option and purchasing a put option

• Purchasing two call options at different prices

• Owning both call and put stock options at the same stock price

• Purchasing two put options at different prices

51. Which of the following would most likely be a way to classify various portfolios?

Answers:

• By the tax laws which apply

• By the number of shares outstanding

• By the time the securities were purchased

• By the time horizon of the investments contained in it

52. Which of the following is an advantage of having multiple portfolios instead of only one?

Answers:

• It lowers the trader's tax obligations.

• It makes it easier for the trader to trade and profit.

• It eliminates all risk.

• Goals can be set for each portfolio and tracked separately.

53. What is the primary theory behind fundamental analysis?

Answers:

• All stocks rise in price eventually.

• Profits can be made in the near term by purchasing mispriced securities.

• Interest rates are the primary indicator of stock prices.

• The management needs direction.

54. What would be the appropriate order to place in the following example?

An investor owns a stock currently trading at $20. They purchased it at $10. They want to ensure they have at least an 80% return.

Answers:

• Place a stop loss at $18

• Place a sell limit order at $16

• Place a buy limit order at $10

• Place a buy limit order at $22

55. Is a stop loss order a buy or sell order?

Answers:

• A buy order

• A sell order

• Can be either

• Is neither

56. Why would a stock trader want to create various portfolios?

Answers:

• So that each portfolio may be taxed separately

• So that each portfolio may contain one stock

• So that each portfolio may be set up to meet specific goals

• So that they may be able to sell all the stocks within a portfolio more easily

57. What is the ideal number of portfolios for an experienced trader?

Answers:

• 1

• 5

• 20

• 100

58. What is meant by a "lagging indicator"?

Answers:

• A market statistic which indicates what changes will typically take place after changes in the stock market

• A report put out by the stock exchange

• One stock price dictating the price of another stock

• Insider information

59. What is a sudden and unexpected drop in stock prices on the stock market referred to as?

Answers:

• Market mechanics

• Market normalization

• Stock market magnitude

• Stock market crash

60. Why do investors often expect stock prices to rise at the beginning of the year?

Answers:

• Because the new year means companies can restart and forget the past

• Because the management is always more driven

• Because the year end sales typically bolster profits and increase demand

• Because employee cuts are made reducing expenses typically after the holidays

61. What is the "date of declaration" with reference to stocks?

Answers:

• The date a stock is initially sold

• The date of the financial report release

• The date the fiscal year ends

• The date a dividend is declared

62. In a bear market, what is a short term rally referred to as?

Answers:

• Bear Market Rally

• Bull Market Rally

• Bull Market

• Bear Market

63. What would credit risk be used to assess?

Answers:

• The management's personal credit score

• The company's ability to pay its long term debts

• The correctness of a technical analysis

• A business's ability to acquire debt capital

64. What is a secular trend?

Answers:

• A near term trend

• A predicted trend in the future

• A past trend

• A long term trend

65. What does the acronym "OTCBB" stand for?

Answers:

• On the Counter Buying Board

• On the Courier Bulletin Board

• Over the Counter Bulletin Board

• Other Time Counting Buying Board

66. What is the relationship between fundamental and technical analyses?

Answers:

• They are mutually exclusive, and an analyst would use one or the other, never both.

• They must both be used together.

• They can both be used to complement each other, but cannot be used together.

• They are very exclusive techniques that should both be avoided.

67. How is risk measured?

Answers:

• It is measured by classifying risk into one of the three levels of risk.

• Individually; each investor assesses their own risk tolerance level.

• As a letter: a,b,c or d

• Someone else assesses your risk level.

68. What impact does the "herd" have on market trends?

Answers:

• It has no impact.

• It makes the market move in an upward direction.

• It leads to an increase in taxation.

• It dictates which way the market will run.

69. What is "capitalization"?

Answers:

• The value of a company based on the number of shares outstanding and the stock price

• The amount of capital the founders have placed in the company

• The amount of debt the company holds

• The retained earnings value of the company

70. What is the most important principle to be followed in goal setting?

Answers:

• Set goals far beyond your reach as motivation

• Don't set too many goals

• Set goals but then don't worry about them

• Set realistic and achievable goals

71. What type of transaction is a limit order?

Answers:

• A buy order

• A sell order

• Can be either

• Is neither

72. Why are younger people more apt to take on riskier investments?

Answers:

• They have a longer time horizon to allow for the risky investments to increase over time, and are immune to the short term changes.

• They do not know the value of money in the long run.

• They have less knowledge and do not know the potential for loss.

• There are short term gains to be made.

73. What is the primary method to mitigate risk?

Answers:

• Diversifying investment holdings

• Day trading

• Purchasing only tech stocks

• Purchasing stock in the company you work for

74. Which type of analysis relies on charting?

Answers:

• Fundamental

• Technical

• Both Fundamental and Technical

• Neither Fundamental nor Technical

75. When the stock market is moving upwards consistently, what may temporarily happen?

Answers:

• A market crash

• A market correction

• A market magnitude

• A market normalization

76. What stage of the market cycle is characterized by product exploration?

Answers:

• Growth stage

• Decline

• Peak

• Idea stage

77. What is the difference between a stock trader and a stock investor?

Answers:

• There is no difference. Both terms refer to people who invest in stocks.

• Stock traders are the same as stock brokers but stock investors are not.

• Stock traders profit on short term price changes, stock investors profit on long term growth.

• A stock investor invests only in blue chip stocks, a stock trader only in risky stocks.

78. Why is an investor unlikely to hold growth, value, small cap, and index portfolios all at once?

Answers:

• Because he has too much time to manage them

• Because they have completely different investment perspectives

• Because taxes would be excessive if he does not do it

• Because it is too difficult to earn a high return on any one portfolio

79. What does the saying "buy low sell high" mean?

Answers:

• Buy a stock when employee morale is low, sell it when it is high

• Invest in bonds when stock prices are high

• Purchase a stock when interest rates are low, sell when they are high

• Purchase a stock when it is at a discounted price, sell it once it has gained value in the market

80. Which of the following would be an indication of market decline?

Answers:

• Increase in crime

• Increase in jobs available

• Decrease in crime

• Increase in auto sales

81. Which of the following is a way for a trader to track their progress towards their goals?

Answers:

• Just keeping it in the back of their minds

• Changing their goals to what they have already achieved

• Creating reports and charts which map their progress alongside with the goal

• Not bothering about setting goals

82. What is meant by a "day order"?

Answers:

• Buying and selling stock on the same day

• Contract for the stock symbol "DAY"

• An order which is only good for the current day, and expires if not executed at the end of the day

• An order that is open indefinitely

83. Why is it important for an investor to know their risk tolerance level before trading stocks and investing in general?

Answers:

• Because it is required by law

• Because it helps in tax planning

• Because it helps them decide which industry to invest in

• Because they can then match their risk tolerance level to the types of stocks they are purchasing

84. What is meant by "diversification"?

Answers:

• Buying as much of one stock as possible

• Buying only speculative stocks

• Purchasing stocks from varying industries to reduce overall risk

• Purchasing options contracts

85. Which of the following is an assumption made by a technical analyst?

Answers:

• The stock price does not reflect market information currently.

• No one else has recognized the stock as a good investment.

• All stocks will increase in the long run.

• The stock price already reflects all news and news events and they do not impact a stock's price.

86. What is the purpose of setting trading goals?

Answers:

• To meet the requirements set by the SEC

• To minimize taxes

• To have a measurable and achievable target

• To guarantee success

87. What is the term used for selling a stock without owning the stock?

Answers:

• Short Selling

• Margin Selling

• Fundamental Selling

• Technical Selling

88. Why do goals have to be specific?

Answers:

• In order to tell others

• In order to be achievable and measurable

• In order to get something done

• In order to be able to change them