Stock Trading Stock Trading 2 — Questions and Answers
Question 1: What does 'short selling' a stock mean?
- Buying a stock quickly during a dip
- Borrowing shares to sell them, hoping to buy back at a lower price (Correct answer)
- Selling a stock you've held for less than a year
- Placing a limit order below the current price
Correct answer: Borrowing shares to sell them, hoping to buy back at a lower price
Short selling involves borrowing shares from a broker, selling them at the current price, then buying them back later at a lower price to profit from the decline.
Question 2: What is a 'stop-loss order'?
- An order to buy a stock when it rises above a set price
- An order to sell a stock when it falls to a specified price (Correct answer)
- An order that stops trading in a volatile market
- A regulation preventing excessive losses in one trading session
Correct answer: An order to sell a stock when it falls to a specified price
A stop-loss order automatically sells a security when its price drops to a predetermined level, limiting the investor's loss.
Question 3: Which of the following best describes 'market capitalization'?
- The total value of a company's annual revenue
- The price of one share multiplied by total shares outstanding (Correct answer)
- The maximum price a stock has reached in the past year
- The total assets minus liabilities on a balance sheet
Correct answer: The price of one share multiplied by total shares outstanding
Market capitalization is calculated by multiplying the current share price by the total number of outstanding shares.
Question 4: What is a 'dividend yield'?
- The percentage of earnings paid as dividends relative to share price (Correct answer)
- The total dividends paid over a company's lifetime
- The ratio of dividends to net income
- The amount of time between dividend payments
Correct answer: The percentage of earnings paid as dividends relative to share price
Dividend yield is calculated by dividing the annual dividend per share by the stock's current price, expressed as a percentage.
Question 5: What does 'P/E ratio' measure?
- Profit relative to equity capital
- Stock price relative to earnings per share (Correct answer)
- Portfolio efficiency versus the market benchmark
- Price appreciation over the prior earnings period
Correct answer: Stock price relative to earnings per share
The Price-to-Earnings ratio compares a stock's current price to its earnings per share, indicating how much investors pay per dollar of earnings.
Question 6: What is 'dollar-cost averaging'?
- Converting foreign currency returns to US dollars
- Investing a fixed dollar amount at regular intervals regardless of price (Correct answer)
- Averaging the cost basis of losing and winning trades
- Setting a target average price before entering a position
Correct answer: Investing a fixed dollar amount at regular intervals regardless of price
Dollar-cost averaging means investing a fixed amount on a regular schedule, buying more shares when prices are low and fewer when prices are high.
Question 7: Which order type guarantees execution but not price?
- Limit order
- Stop-limit order
- Market order (Correct answer)
- Good-till-canceled order
Correct answer: Market order
A market order executes immediately at the best available price, guaranteeing a fill but not the exact price you'll receive.
Stock Trading Stock Trading 2
What does 'short selling' a stock mean?