Test Your Investor IQ

If you are an investor, or are considering investing in the markets, start with this test.

T or F Stocks are more likely to provide higher rates of return than bonds or money market investments.

• TRUE Today as always, stocks are the first and foremost avenue to greater returns yet they come with the potential for greater risks.

T or F To avoid losses, it’s better to concentrate my investments in stocks in just one or two good companies.

• FALSE There are many reasons to diversify, but one of the primary ones is to avoid losing your investment if the company you’ve invested in suffers a loss. Even good companies can have bad years.

T or F With stocks, bonds and mutual funds, when they say “Past performance is no guarantee of future results,” they are referring to its track performance in the past.

• TRUE A top-performing investment in one year isn’t necessarily going to be next year’s best performer. It’s not uncommon for a stock or fund to have better-than-average performance one year and mediocre or below-average performance the following year. That’s why the SEC requires investment companies to tell investors that “past performance does not necessarily predict future results.”

T or F Diversifying within the markets eliminates risk.

• FALSE Simple put, diversifying with a number of stocks, bonds or mutual funds helps reduce risk but does not eliminate it.

T or F “Capital gain” is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

• TRUE The key word here is “worth.” You do not realize a gain until the asset is sold.

T or F Two good reasons for investing in stocks long-term is to build the value of your portfolio and/or to stay ahead of inflation.

• TRUE Stocks make ideal investments for these long-term objectives.

T or F Investors who are concerned about “risk” (the possibility of losing money in their investments) should concentrate on just one stock and follow it closely.

• FALSE Just the opposite. Investors concerned with risk in their portfolios should diversify across stocks, bonds and money market funds. Often, an investor who is diversified in this way will not need to watch his or her holdings as closely.

T or F If an employer offers a stock investment program through the company, it’s a good idea to participate in these programs.

• TRUE While not all employers offer these programs, many do and, due to the tax savings, employees stand to benefit from them.

T or F “Allocating assets” is the same thing as “diversification.”

• FALSE While diversification is the process of apportioning capital in a way that reduces the exposure to a particular asset or risk, allocating assets is employing an investment strategy to balance risk-versus-reward by adjusting the percentage of each asset in your portfolio according to your risk tolerance, goals and investment time frame.

T or F Diversification eliminates risk.

• FALSE Diversification can help to eliminate risk, but risk is inherent in the markets and investors need to understand they face the potential of loss of their investment. Investors who want to avoid risk should contain their investments to safer money market accounts, which offer relatively low rates of return but a very low risk of loss.

T or F I own a small company. Am I able to issue stocks?

• TRUE Any company can issue stocks. However, only companies that meet legal requirements can issue shares for trading on U.S. stock exchanges, to be bought and sold by anyone.

Have more questions before your proceed with your investment plans and goals? - myprimetimenews