What’s Your Investment IQ?

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May 4, 2017

Investing in the financial markets is now part of everyday life. Yet, many Americans remain in the dark about investment products and how they work. Interested in testing your knowledge?

1. When a company goes bankrupt, who gets paid first?¹,²

a. Preferred stockholders

b. Bond owners

c. Secured creditors

d. Suppliers and contractors

2. Which of the below is one difference between an open-ended mutual fund and an ETF?³

a. Active management

b. Pools many investors’ savings

c. Portfolios hold many individual securities

d. Shares trades throughout the day

Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

3. If you believe interest rates will increase, what should you consider doing?

a. Sell stock holdings

b. Sell long-term bonds

c. Buy long-term bonds

d. Buy gold

The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.

4. A convertible bond is… ²

a. A bond that can be converted into shares of a company’s stock

b. A bond without a roof? on the interest rate it may pay

c. A bond that can be converted to cash

d. A bond that pays no interest, but converts to stock

5. The U.S. Gross Domestic Product (GDP) is a measure of…?

a. The total value of the economy’s assets

b. The dollar value of the output of all publicly traded companies

c. The annual aggregate output of the manufacturing and mining sectors

d. The monetary value of all services and goods produced

6. Selling short means…?⁴

a. Selling shares before they reach their peak price

b. Selling borrowed shares of a company

c. Selling shares of a stock you already own

d. Selling shares in the after markets

7. An annuity that is purchased with a single lump sum and provides income within a year of purchase is… ?

a. An index annuity

b. An immediate annuity

c. A fixed rate annuity

d. A variable annuity

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawals is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

8. The Federal Open Market Committee regularly assesses the economy and its monetary policy, which may have an impact on the markets. How often do they meet each year?

a. Once about every six weeks

b. Monthly

c. Quarterly

d. Semi-annually

9. You are permitted to change from one 529 College Savings Plan to another plan

a. Once in a lifetime

b. As often as you like

c. Once every 12 months

d. Just five times over the life of the beneficiary

10. Investing in overseas markets involves risk that investing in domestic markets do not. Identify one of those risks.⁶

a. International stocks move on news from around the world

b. The time difference can lead to unanticipated pricing discrepancies

c. Stocks are traded on different exchanges

d. Currency fluctuations can affect investment returns

Answers

  1. C
  2. D
  3. B
  4. A
  5. D
  6. B
  7. B
  8. A
  9. C
  10. D

Scoring

  • 9-10 Correct: Excellent job!
  • 6-8 Correct: Not bad, but there‘s more to learn.
  • 0-5 Correct: It may be time to study up on investing.
  1. The return and principal value of stock and preferred stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
  2. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
  3. Exchange Traded Funds (ETFs) are subject to market and the risks of their underlying securities. Some ETFs may involve international risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility. ETFs that focus on a small universe of securities may be subject to more market volatility as well as the specific risks that accompany the sector, region or group. An ETFs trading price may be at a premium or discount to the net asset value of the underlying securities.
  4. In order to sell short, you are required to open a margin account. Selling a security short involves greater risk, including the risk of unlimited of unlimited losses in a position. Selling short is not suitable for all investors.
  5. A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. Also consider the fees and expenses associated with the particular plan. Whether a state tax deduction is available will depends on your state of residence. State tax laws and treatment may vary. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.
  6. International investments carries additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility. The return and principal value of stock and preferred stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

 

 


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