Stock Trading Stock Trading 3 — Questions and Answers
Question 1: What does 'beta' measure in stock analysis?
- A stock's dividend growth rate
- A stock's volatility relative to the overall market (Correct answer)
- A company's debt-to-equity ratio
- The probability of a stock beating earnings estimates
Correct answer: A stock's volatility relative to the overall market
Beta measures how much a stock's price tends to move relative to the broader market; a beta above 1 means higher volatility than the market.
Question 2: What is an 'ETF'?
- An earnings tracking forecast issued by analysts
- A fund that holds a basket of securities and trades on an exchange like a stock (Correct answer)
- An electronic trading fee charged per transaction
- A federally regulated trust that holds Treasury bonds
Correct answer: A fund that holds a basket of securities and trades on an exchange like a stock
An Exchange-Traded Fund (ETF) holds a collection of assets and trades on a stock exchange throughout the day at market prices.
Question 3: What happens to existing shareholders during a 2-for-1 stock split?
- They receive double the shares at half the price per share (Correct answer)
- They must purchase additional shares at a discounted price
- Their shares are consolidated and the price doubles
- They receive a special cash dividend equal to half the share price
Correct answer: They receive double the shares at half the price per share
In a 2-for-1 stock split, shareholders receive two shares for every one they held, and the price per share is halved, keeping total value unchanged.
Question 4: What is 'insider trading' in the context of US securities law?
- Trading stocks only listed on domestic exchanges
- Buying or selling securities based on material non-public information (Correct answer)
- Trading during pre-market hours before the exchanges open
- Making trades within a company's own 401(k) plan
Correct answer: Buying or selling securities based on material non-public information
Insider trading refers to buying or selling a security based on material information not available to the public, which is illegal under SEC regulations.
Question 5: What does 'going long' on a stock mean?
- Holding a stock for more than one year for tax benefits
- Buying a stock with the expectation its price will rise (Correct answer)
- Using leverage to amplify a position's size
- Selling a stock you do not currently own
Correct answer: Buying a stock with the expectation its price will rise
Going long means purchasing a stock with the expectation that its price will increase, allowing you to sell later at a profit.
Question 6: Which financial statement shows a company's revenues and expenses over a period?
- Balance sheet
- Statement of cash flows
- Income statement (Correct answer)
- Statement of retained earnings
Correct answer: Income statement
The income statement (also called the profit and loss statement) summarizes revenues, costs, and expenses over a specific accounting period.
Question 7: What is 'bid-ask spread' in stock trading?
- The difference between a stock's 52-week high and low
- The gap between the highest price a buyer will pay and the lowest price a seller will accept (Correct answer)
- The commission charged by a broker on each trade
- The difference between a stock's opening and closing price
Correct answer: The gap between the highest price a buyer will pay and the lowest price a seller will accept
The bid-ask spread is the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers will accept (ask).
Stock Trading Stock Trading 3
What does 'beta' measure in stock analysis?