Stock Trading Stock Trading 5 — Questions and Answers
Question 1: What does 'diversification' mean in an investment portfolio?
- Investing only in high-growth technology stocks
- Spreading investments across different asset classes to reduce risk (Correct answer)
- Frequently buying and selling to maximize returns
- Concentrating capital in the best-performing sector
Correct answer: Spreading investments across different asset classes to reduce risk
Diversification means allocating investments across various assets, sectors, or geographies to reduce the impact of any single investment's poor performance.
Question 2: What is 'technical analysis' in stock trading?
- Evaluating a company's financial statements and management quality
- Using historical price and volume data to forecast future price movements (Correct answer)
- Analyzing a company's technology patents and R&D spending
- Reviewing SEC filings to identify accounting irregularities
Correct answer: Using historical price and volume data to forecast future price movements
Technical analysis studies past price movements, chart patterns, and trading volume to identify trends and predict future price behavior.
Question 3: What is 'day trading'?
- Trading stocks only during regular market hours (9:30 AM – 4:00 PM ET)
- Buying and selling securities within the same trading day to profit from short-term price moves (Correct answer)
- Holding positions for exactly one calendar day
- Using daily market summaries to make weekly investment decisions
Correct answer: Buying and selling securities within the same trading day to profit from short-term price moves
Day trading involves opening and closing positions within a single trading session, with the goal of profiting from intraday price fluctuations.
Question 4: Under the Pattern Day Trader (PDT) rule, how many day trades can a margin account make in 5 business days before being classified as a pattern day trader?
- 2 or more
- 3 or more
- 4 or more (Correct answer)
- 5 or more
Correct answer: 4 or more
FINRA's PDT rule classifies a trader as a pattern day trader if they execute 4 or more day trades within 5 business days in a margin account.
Question 5: What is 'fundamental analysis'?
- Studying chart patterns and moving averages to predict prices
- Evaluating a company's financial health, earnings, and competitive position to determine its intrinsic value (Correct answer)
- Analyzing the basic supply-and-demand forces driving a stock's price
- Comparing a stock's performance to fundamental benchmark indexes
Correct answer: Evaluating a company's financial health, earnings, and competitive position to determine its intrinsic value
Fundamental analysis examines a company's financial statements, management, industry position, and economic factors to estimate its true or intrinsic value.
Question 6: What does it mean when a stock is 'ex-dividend'?
- The company has canceled its upcoming dividend payment
- Buyers of the stock on or after this date will NOT receive the next dividend (Correct answer)
- The stock's dividend has been excluded from the P/E calculation
- The stock trades at a price lower than its declared dividend
Correct answer: Buyers of the stock on or after this date will NOT receive the next dividend
The ex-dividend date is the cutoff; investors who buy shares on or after this date are not entitled to the upcoming dividend payment.
Question 7: What is 'liquidity' in the context of stock trading?
- The amount of cash held in a brokerage account
- The ease with which a security can be bought or sold without significantly affecting its price (Correct answer)
- A measure of a company's ability to pay short-term debts
- The percentage of a portfolio that can be converted to cash within 24 hours
Correct answer: The ease with which a security can be bought or sold without significantly affecting its price
Liquidity describes how quickly and easily a security can be traded at a fair price; highly liquid stocks have many buyers and sellers and tight bid-ask spreads.
Stock Trading Stock Trading 5
What does 'diversification' mean in an investment portfolio?