Lesson 1 P2-Learn stock trading for beginners from scratch with Quiz Questions : Understanding what stocks are and how they work

C) A marketplace where stocks are bought and sold

A stock exchange is a marketplace where stocks are bought and sold. It is a platform that facilitates the buying and selling of stocks, bonds, and other securities between investors and companies. The stock exchange provides a regulated and transparent environment for investors to trade shares of publicly traded companies. Buyers and sellers can place their orders through a broker, who then executes the trade on the exchange. The stock exchange also provides important information about the companies listed on it, including financial statements, news, and other data that can be used to make investment decisions. Some of the well-known stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the Tokyo Stock Exchange. The stock exchange plays a vital role in the economy by providing companies with access to capital and investors with the opportunity to invest in the growth of businesses. It also serves as a barometer of economic health, as the performance of the stock market is often seen as an indicator of the overall health of the economy.

C) The first time a company offers its shares to the public

An initial public offering (IPO) is the first time a company offers its shares to the public. This is the process by which a privately owned company becomes a publicly traded company by issuing shares of stock to the general public. The purpose of an IPO is to raise capital for the company by selling shares to investors. The company hires investment banks to help determine the offering price, underwrite the shares, and market the offering to potential investors. In an IPO, the company’s owners sell a portion of their shares to the public, and in exchange, the investors who buy those shares become part owners of the company. After the IPO, the company’s shares are traded on a stock exchange, and the price of those shares is determined by supply and demand in the market. An IPO is a significant event for a company, as it allows them to access new sources of capital and increase their public visibility, but it also comes with additional regulations and responsibilities that public companies must adhere to.

B) A stock issued by a well-established and financially sound company

A blue-chip stock is a stock issued by a well-established and financially sound company. These companies are typically industry leaders that have a long track record of stability and success, and are known for their consistent earnings and dividends. Blue-chip stocks are considered to be less risky than other types of stocks, as they have a proven track record of performance and are usually less volatile than other stocks. Some examples of blue-chip stocks include Apple, Microsoft, and Coca-Cola. Because of their stability and reliability, blue-chip stocks are often popular investments for long-term investors looking for a steady stream of income and capital appreciation over time. Blue-chip stocks are also considered to be a benchmark for the overall performance of the stock market, and their movements are often closely watched by investors and analysts as a barometer of economic health.

B) Trading based on information that is not available to the public

Insider trading is the act of trading securities (such as stocks) based on information that is not available to the public. This information is usually obtained by individuals who have access to confidential information about a company, such as corporate executives, directors, or major shareholders. Trading based on this non-public information is illegal because it gives the trader an unfair advantage over other investors who do not have access to this information. It can also be harmful to the integrity of the financial markets and to public confidence in the fairness of those markets. Insider trading is subject to prosecution by regulatory authorities, and penalties can include fines, imprisonment, and civil lawsuits. In order to prevent insider trading, companies must establish and enforce policies that restrict employees and insiders from buying or selling company stock based on confidential information. They also must disclose relevant information to the public in a timely and fair manner, so that all investors have access to the same information at the same time.

B) Someone who helps buy and sell stocks on behalf of clients

A stockbroker is a licensed professional who helps clients buy and sell stocks and other securities in financial markets. They work for brokerage firms and act as intermediaries between the client and the stock exchange. Stockbrokers provide advice and assistance to clients in making investment decisions, based on their goals, risk tolerance, and market conditions. They also help clients manage their portfolios, by monitoring performance and recommending changes as needed. Stockbrokers earn commissions and fees for their services, and may also receive bonuses based on their performance. They must be registered with the Securities and Exchange Commission (SEC) and pass certain exams in order to practice. Investors who do not have the time, knowledge, or resources to manage their own investments often hire a stockbroker to help them navigate the complex world of financial markets and make informed decisions about their investments.

B) An order to buy or sell a stock at a specified price or better

A limit order is a type of order to buy or sell a stock or other security at a specified price or better. With a limit order, the investor sets a price at which they are willing to buy or sell the security. The order will only be executed if the market price reaches or exceeds the specified price. For example, if an investor wants to buy a certain stock, they may place a limit order to buy it at a price of $50 per share. If the stock’s market price drops to $50 or below, the order will be executed and the investor will buy the stock at the specified price. If the stock’s price does not reach $50, the order will not be executed. Similarly, if an investor wants to sell a stock, they may place a limit order to sell it at a specific price. This can be useful for investors who want to lock in a certain price for a trade or avoid buying or selling at a less favorable price. However, there is a risk that the limit order may not be executed if the market price does not reach the specified price, which can result in missed opportunities or losses.

A) A right to buy or sell a stock at a specified price within a certain time period

A stock option is a contract that gives the holder the right, but not the obligation, to buy or sell a specific stock at a set price within a certain time period. The buyer of a stock option pays a premium to the seller in exchange for the right to buy (a call option) or sell (a put option) the underlying stock at a predetermined price, called the strike price. The time period during which the option can be exercised is called the expiration date.

Stock options can provide investors with flexibility and leverage, as they allow the holder to participate in the potential upside of a stock while limiting their downside risk. For example, if an investor believes a stock is going to increase in value, they may buy a call option to purchase the stock at a lower price than the expected market price. This can potentially result in a profit if the stock price rises above the strike price before the option expires.

On the other hand, stock options can be complex and involve significant risk. If the market price of the stock does not reach the strike price before the option expires, the option may be worthless and the buyer will lose the premium paid. Additionally, there can be tax implications for both the buyer and seller of stock options. It is important for investors to thoroughly understand the mechanics and risks of stock options before trading them.

A) An order to buy or sell a stock at the current market price

A market order is an order to buy or sell a stock at the current market price. This means that the trade will be executed immediately at the best available price, which could be higher or lower than the current quoted price. Market orders are typically used when the speed of execution is more important than the price at which the trade is executed.

C) The ratio of a company’s annual dividend payout to its stock price

Dividend yield is a financial ratio that represents the annual dividend payment made by a company relative to its stock price. It is calculated by dividing the annual dividend per share by the current market price per share. The dividend yield is expressed as a percentage, and it is used to measure the amount of cash flow generated by a stock’s dividend payments. A higher dividend yield indicates that a company is paying out a larger percentage of its earnings as dividends, while a lower dividend yield suggests that a company is reinvesting more of its earnings back into the business.

A) A measure of a company’s stock price relative to its earnings

The price-to-earnings (P/E) ratio is a valuation ratio used to compare a company’s current stock price to its earnings per share (EPS). It is calculated by dividing the current market price per share by the company’s earnings per share over the previous 12 months. The P/E ratio is a widely used metric for valuing stocks, and it is commonly used by investors to determine whether a stock is overvalued or undervalued. A high P/E ratio generally indicates that a stock is trading at a higher price relative to its earnings, while a low P/E ratio suggests that a stock is undervalued or has a lower price relative to its earnings. However, it’s important to note that P/E ratios can vary significantly across industries, so it’s important to compare a company’s P/E ratio to its peers within the same industry.