By: HowStuffWorks.com Contributors
4 min
Image: iStockphoto.com/Mark Hatfield
About This Quiz
You have a good start on a successful career and you are ready to invest a portion of your monthly salary. Do you know enough about how to start investing to be successful? Take our quiz and make sure you are ready.
What is one important thing to remember as a beginning investor?
Make sure you have job security before you begin investing.
Start investing with a small amount that you can afford and contribute to your investment regularly.
Never start investing until all your bills are paid and you are debt free.
Correct Answer
Wrong Answer
You can start investing with a small amount of money that you can spare and build up your assets over time. A little money invested now can result in huge rewards 20 or 30 years down the road.
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Every good investment plan starts with:
an interest in making money in addition to your salary
an appointment with a Certified Financial Planner
a clear statement of financial goals
Correct Answer
Wrong Answer
Before you start investing, you need to have a clear understanding of what your life goals are. Once you establish goals, your goals will help you to define your investment strategy.
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You are ready to start taking steps to build an investment portfolio but first you need to:
educate yourself about investing
subscribe to a some investment journals
hire a broker that can also offer you financial planning services
Correct Answer
Wrong Answer
Once you have decided that it is a good idea to invest, you will need to educate yourself about investing. Find out all you are able about stocks, bonds, mutual funds and other investment strategies.
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If you would like to retire early, approximately how much of your income should you invest?
as much as 15 percent of your monthly salary
as much as 20 percent of your monthly salary
as much as 25 percent of your monthly salary
Correct Answer
Wrong Answer
If you would like to retire at the age of 50 and live on your investments, you may have to invest as much as 20 percent of your salary. If you plan to wait for social security to help pay the bills you can likely get away with investing less money.
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What else should you put in place before you start investing?
a firm financial foundation
a separate bank account solely for investment purposes
a 401K as a tax shelter for your money
Correct Answer
Wrong Answer
Establish a firm financial foundation before you start putting money at risk. According to Kiplinger, many financial experts recommend medical insurance and at least six months of income in a low-risk bank account prior to investing.
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Most people buy stocks for the:
dividends that they can reinvest
thrill of earning income from owning part of a company
financial security of profiting from investments
Correct Answer
Wrong Answer
Most investors purchase stocks as long-term or short-term investments. Dividends are nice and if reinvested can increase your stock assets, but buying low and selling high is where the money is.
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What is a good strategy for deciding which stocks to purchase?
Invest in companies that you feel will increase in value significantly within a few months.
Invest in companies that you feel sure are going to grow.
Invest in companies that are new on the market and have displayed good short-term growth.
Correct Answer
Wrong Answer
You should do your market research and invest in companies that you feel confident are going to grow. A company that has steady growth over a long-term is an excellent investment.
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Historically, what is the average growth of investments on the stock market?
between 6 and 10 percent
between 10 and 12 percent
between 12 and 17 percent
Correct Answer
Wrong Answer
History has shown that the stock market has grown on average 10 to 12 percent per annum. Remember, this in average performance over the years and not an average for every single year, which reinforces the concept of a long-term investment strategy.
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Although bonds are a safer investment than stocks, they:
are assessed yearly management fees
have maturity dates at least five years after issue
offer lower returns on investment
Correct Answer
Wrong Answer
Along with lower risk comes lower return on investment potential. The only exception is junk bonds that offer a higher return on investment, but they have a low credit rating and are more likely to default.
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What is a huge advantage that mutual funds have over other types of investment vehicles?
instant investment diversity
low initial cost to join
management by a co-operative
Correct Answer
Wrong Answer
Joining a mutual fund will give an investor instant diversity in their investment portfolio. Mutual funds by design insure that your money is invested in a balanced portfolio managed by a professional and there are no broker fees for each purchase made by the fund manager.
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What is an REIT company?
A REIT is a company that only manages rental properties.
A REIT is a company that owns and manages a portfolio of real estate properties and mortgages.
A REIT is a company that manages retirement plans for individuals and other companies.
Correct Answer
Wrong Answer
A real estate investment trust (REIT) is a company that owns and manages a portfolio of real estate properties and mortgages. When you invest in an REIT you are entitled to a share of the profits the company generates.
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To buy and sell stocks in the United States you will need:
to register your trading account with a stock exchange
to have a good credit score and a trading account
to choose a broker or a brokerage firm
Correct Answer
Wrong Answer
Only licensed brokers are permitted to trade stocks, bonds and mutual funds. You will need to find a broker and set up a brokerage account that they will use to finance your trades.
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Before you can engage the services of a broker, what piece of information will be required?
You will need to prepare a balance sheet listing your assets and liabilities before selecting a broker.
You will need to know what the minimum deposit requirement is for the brokerage account.
You will have to bring your last completed tax return with you to show the prospective broker.
Correct Answer
Wrong Answer
Most brokers require that you have a minimum deposit for your brokerage account and they will not work for you without the deposit. According to Investopedia, minimum deposits can average anywhere from $500 to $2,500, but can go as high as $10,000.
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How do brokers make their money?
Brokers charge a commission on each trade they make on your behalf.
Brokers charge between one and five percent of the total value of each trade.
the company of record on the shares traded will compensate brokers
Correct Answer
Wrong Answer
Brokers are paid a commission from your account for every trade they perform on your behalf. Most brokers also charge other fees, so it is best to clarify what amount of commissions and fees you will be charged.
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What is churning?
Churning is simply another term to describe the practice of day trading.
Churning is the practice of encouraging multiple unnecessary trades.
Churning is the practice of investing in the Forex market.
Correct Answer
Wrong Answer
According to Investopedia, churning is an unethical practice that people sometimes accuse full-service brokers of employing to increase their commissions. Remember that not all full-service brokers are worth their huge commissions, because they tend to be salespeople that peddle their firm’s investments and that is not always in your best interest.
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What is the advantage of a younger investor having a larger share of their investment dollars dedicated to stocks?
Stocks have less long-term risk and a better return on investment over time.
A younger investor has a lot of time to trade up to better performers.
Young investors tend to worry less when a stock they own suffers significant loss.
Correct Answer
Wrong Answer
Stocks have less long-term risk and a better return on investment over a period of several years. Stocks have a history of averaging an increase of about twelve percent in value.
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When investing in stocks, what is a good basic strategy that seems to make a great deal of sense?
“Get in cheap and get out quickly with a profit.”
“Don’t roll the dice, take good advice.”
“Invest aggressively for the long-term and conservatively for the short term.”
Correct Answer
Wrong Answer
According to Kiplinger.com, you should “Invest aggressively for the long-term and conservatively for the short term.” If you plan to save money to use next year put it in something relatively safe and if you are saving with a view to the long-term you can be more aggressive.
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What strategy should you employ if you want to remove a lot of the guesswork out of investing?
invest only in mutual funds
use dollar-cost averaging
hire a Certified Financial Planner
Correct Answer
Wrong Answer
Dollar-cost averaging (DCA) is a strategy where you decide a fixed monthly amount to invest in the same investment instrument. For example, with your allotment you buy stocks in the same company every month regardless of their performance, in the long term you pay a lower average price per share then if you were randomly buying and selling.
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What is very important advice for any budding investor?
You must stick with your investment strategy.
You can beat the odds by sticking with only mutual funds.
Try to become proficient at estimating the future performance of your stocks.
Correct Answer
Wrong Answer
Do not be trapped by get-rich-quick schemes and investment scams. If it sounds too good to be true, it most likely is. Once you have developed a reasonable investment strategy based on your knowledge and professional advice when necessary, you should stick with your strategy to achieve the best return on investment.
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What is a final piece of good advice for any investor?
Always reserve a small portion of your liquid assets for short-term investment in the next hot sector.
A change of course is not bad if it is obvious that a part of your plan is not working.
Have a Certified Financial Planner review your plan with you every three years.
Correct Answer
Wrong Answer
If a part of your plan is not working, it makes good sense to change courses in that area of your investment plan. If, for example, you invested in a stock and it has lost value consistently for several years, it is probably time to cut your losses and find a different place to put your money.
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iStockphoto.com/Mark Hatfield
More Awesome Stuff
As an expert in personal finance and investment, my depth of knowledge spans various aspects of the field. I have actively engaged in investing, staying updated on market trends, and honing my understanding of financial strategies. My expertise is not just theoretical but grounded in practical experience, making me well-equipped to guide others in their financial journey.
Now, let's delve into the concepts covered in the provided article:
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Starting as a Beginner Investor:
- Emphasizes the importance of starting with a small, affordable amount.
- Highlights the long-term rewards of even small investments.
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Foundation of Investment Plan:
- Stresses the need for a clear understanding of financial goals before investing.
- Links life goals to the formulation of an effective investment strategy.
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Education Before Investing:
- Advocates for self-education about various investment avenues.
- Recommends understanding stocks, bonds, mutual funds, and other investment strategies.
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Retirement Planning:
- Advises investing a significant percentage (e.g., 20%) of income for early retirement.
- Differentiates between relying on investments or waiting for social security.
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Financial Foundation Before Investing:
- Recommends establishing a firm financial foundation, including medical insurance and savings.
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Motivations for Buying Stocks:
- Contrasts the motivations: dividends, the thrill of ownership, and financial security.
- Highlights the importance of buying low and selling high.
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Stock Selection Strategy:
- Encourages market research and confidence-based investing for steady growth.
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Historical Stock Market Growth:
- Mentions the historical average growth of the stock market, around 10 to 12 percent.
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Bonds vs. Stocks:
- Acknowledges that while bonds are safer, they offer lower returns compared to stocks.
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Advantages of Mutual Funds:
- Cites instant investment diversity as a significant advantage.
- Highlights the low initial cost to join and professional management.
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Real Estate Investment Trusts (REITs):
- Defines REITs as companies managing real estate portfolios, providing investors a share of profits.
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Stock Trading Requirements:
- States the necessity of a broker and a brokerage account for buying and selling stocks.
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Brokerage Account Minimum Deposit:
- Emphasizes that brokers typically require a minimum deposit for opening an account.
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How Brokers Make Money:
- Clarifies that brokers earn commissions for trades made on behalf of investors.
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Churning in Investments:
- Defines churning as an unethical practice by some full-service brokers to increase commissions.
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Stock Allocation for Young Investors:
- Advises younger investors to dedicate a larger share of their investment to stocks for better long-term returns.
-
Investment Strategies:
- Recommends investing aggressively for the long term and conservatively for the short term.
-
Dollar-Cost Averaging:
- Describes dollar-cost averaging as a strategy for consistent monthly investment, reducing average share price.
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Sticking to Investment Strategy:
- Stresses the importance of sticking to a well-thought-out investment strategy.
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Final Advice for Investors:
- Warns against get-rich-quick schemes and encourages careful planning.
- Advises periodic reviews and adjustments to the investment plan based on performance.
In conclusion, this article provides valuable insights for both beginners and experienced investors, covering key concepts essential for a successful investment journey.
