Unit 5.1: Stocks

If you are trying to buy low now and sell high later, it is better to buy stocks just before interest rates increase.

(hint: stocks will cost more money before the interest rates increase, and will fall in value after the increase.)

• true (you should buy just before interest rate increase)

• false (you should buy after interest rate increase)

• false (interest rates do not affect stock values)

Answer explanation

Stocks lose value when interest rates are high because investors move their money to interest-bearing instruments, so you should wait until interest rates are high to buy the stock.

Buy low --> sell high!

Putting your money “to work” to earn interest, dividends, or capital gains so that you will have more money in the future is called ?

• savings and investing

• wasting money

• setting goals

• diversifying 

Answer explanation

Saving and investing makes your money grow!

Robin is an investor. Which financial product makes her a shareholder in a corporation?

• bonds

• CDs

• common stocks

• collectables

Answer explanation

shareholder = stockholder

Stocks give shareholders partial ownership in a corporation.

corporation = business, company

CD = certificate of deposit

Common stock might pay ?

• stock indices

• coupon payments

• interest

• dividends

Answer explanation

Corporations can use their profits to pay dividends to shareholders of stock.

Stocks do not pay interest.

Savings instruments like CDs pay interest; loans charge interest.

Bonds are loans that pay/charge interest called the "coupon."

A person owns a stock that pays a $3.00 a share dividend. If the person chooses to reinvest that dividend, this means that the $3.00 will go toward buying ?

• preferred stock in another corporation.

• more of the same stock.

• stocks that are similar to those she already owns.

• bonds in the corporation.

Answer explanation

"dividend reinvestment plan"

Which of the following is your right as a shareholder of common stock?

• The right to hire officers of the corporation.

• The right to receive discounts on products and services.

• The right to receive dividends if paid.

• The right to receive interest payments.

Answer explanation

Stocks DO NOT earn interest!

Shareholder have the right:

1) to vote for members of the board of directors and for policy issues,

2) to receive dividends (if the company pays them),

3) to sell their stock to another investor at any time.

-- The board of directors represents shareholders.

-- Corporate officers are the (grossly overpaid and undertaxed) managers and bosses of the corporation, like the "CEO" and "CFO."

Which of the following increases your assets and wealth?

• profiting from capital gains

• running a marathon

• taking out a loan (going into debt)

• volunteering at a hospital

What is the largest equities market (stock exchange) in the world?

• American Stock Exchange (AMEX)

• Federal Deposit Insurance Corporation (FDIC)

• NASDAQ

• New York Stock Exchange (NYSE)

Answer explanation

FDIC is NOT a stock exchange; it's a promise that the government will pay back deposits to customers if their bank loses the money (Unit 2).

Which factor is most likely to affect the market price of a stock?

• age of corporation

• corporate profits

• number of corporate employees

• wages of employees

Rising interest rates have which effect on stocks?

• Rising interest rates depress (lower) stock prices.

• More investors move from interest-paying investments to stocks.

• Rising interest rates inflate (raise) stock prices.

• Rising interest rates have no effect on stocks.

Answer explanation

Increasing interest rates has a negative effect on stock prices --> more investors move from stocks to interest-paying instruments like bonds.