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What Do You Know About Investing?—Answers and Scoring

0-5 correct answers: It's time to learn about investing.

6-9 correct answers: You're on your way, but you still have some gaps in your knowledge to fill. Read up on the answers you missed, below.

10-14 correct answers: You're comfortable with the terms and strategies of basic investing—so put your knowledge to good use when building your portfolio.

1. d. When you own a share of stock, you effectively become an owner of the company, which gives you a stake in the company's profits and future growth.

2. a. A bond is a debt instrument that acknowledges that a corporation or government agency has borrowed money from the bondholder and will repay it, with interest, at the end of a set period of time. When the bond matures, you receive the face amount.

3. c. Mutual funds provide an opportunity to invest in a diversified portfolio of securities that are chosen and monitored by some of the best professional money managers in the United States.

4. c. You'll need cash, bonds and stocks if you want to grow your money ahead of inflation without exposing yourself to unnecessary risk.

5. b. While news or rumors can cause a big blip in the price of a company's shares, the main thing that influences a stock's price over time is earnings.

6. b. Not all stocks move in sync with the broad market. As a result, a few stocks may actually gain value during a bear market.

7. b. Although stocks generally outperform bonds over long periods of time, bonds can and do sometimes beat stocks over shorter periods. In the year 2000, for example, long-term U.S. Treasury bonds gained 21%, while the Dow Jones industrial average fell 6%.

8. b. Just because bonds are known as "fixed-income investments" doesn't mean they can't lose value. Sure, their life span and interest payments are fixed, but their market value can fluctuate, sometimes widely. Only if you hold a bond to maturity (and the issuer doesn't default or call in the bond in the meantime) can you be sure to get your full principal and all the interest you expect.

9. c. The phrase "high-yield bonds" sounds respectable enough, but it's just a polite term for "junk" bonds, the riskiest of all corporate bonds. To compensate investors for the greater risk that the issuer might default, junk bonds typically pay higher yields than top-quality "investment-grade corporates." For safety, stick with U.S. Treasury bonds.

10. b. Bond prices move in the opposite direction from interest rates. When interest rates rise, bond prices fall, because newly issued bonds have higher payouts, making the older lower-yielding bonds less attractive.

11. d. The goal is never to look at any one factor when evaluating a mutual fund. By law, a fund must send you a prospectus that gives details about the fund's investment philosophy and performance—read it carefully.

12. a. An index fund can be based on one of several different benchmarks used to track stocks and bonds. Four of the most used indexes: Standard & Poor's 500 Stock Index covers large U.S. companies; Russell 2000 Stock Index covers small U.S. companies; Wilshire 5000 Stock Index covers large, medium and small U.S. companies; and Lehman Brothers aggregate bond index covers the total U.S. taxable bond market.

13. a. A sales load is a commission paid to an investment advisor or fund salesperson.

14. c. Dollar cost averaging takes the emotion out of investing and prevents you from trying to time the market.