Stock Advisor Trainer 4

Question 1

A Stock Advisor trainer describes 'margin of safety.' What does it mean?

Accepted Answer

Buying below estimated intrinsic value to cushion against error

Answer

Margin of safety means purchasing at a discount to intrinsic value so estimation errors are less damaging.

Question 2

What is the main risk of investing on margin (borrowed funds)?

Accepted Answer

Losses are amplified and can exceed the initial investment

Answer

Margin magnifies both gains and losses, and a margin call can force selling at a loss.

Question 3

A trainee asks about market capitalization. How is it calculated?

Accepted Answer

Share price multiplied by total shares outstanding

Answer

Market cap equals the current share price times the number of outstanding shares.

Question 4

Why does a trainer emphasize a long-term horizon for equity investing?

Accepted Answer

It lets compounding work and smooths short-term volatility

Answer

A long horizon allows compounding to build wealth and reduces the impact of short-term price swings.

Question 5

What does the 'free cash flow' figure tell an investor?

Accepted Answer

Cash a company generates after capital expenditures

Answer

Free cash flow is the cash left after operating expenses and capital spending, available to reward shareholders or reinvest.

Stock Advisor Practice Test