Investment quiz reveals stock market readiness

by Jack Lantis

for the Business Journal

In this age of do-it-yourself investing, some investors are making important investment decisions based on too little knowledge that sometimes result in costly mistakes.

Although access to investment information is easily available just about everywhere, some investors think they know more about investing than they actually do. Therein lies the danger.

According to a recent study conducted by three professors at the Johnson Graduate School of Management at Cornell University, uninformed investors were just as confident and aggressive in their stock trading as investors who were much more informed.

The research showed that people vastly overestimate how much information they have, and, as a result, don't act cautiously enough.

If you'd like to put your investing knowledge to the test, take this quick quiz on the basics of investing. It's a good idea to find out now how much investing knowledge you actually have. That way, you have all the information you need to decide to what extent you want to be involved in making your own investment decisions.

1. Although past performance can't guarantee future results, which type of investment has significantly fought inflation over time? A. Common stocks B. Long-term corporate bonds C. Long-term government bonds D. Treasury bills

2. You would not have to pay federal income taxes on interest payments received from which of the following securities? A. Corporate bonds B. Treasury securities C. Municipal bonds D. Common stock

3. How much money can a married couple contribute to their individual retirement account each year? A. $2,000 B. $1,000 C. $2,250 D. $4,000

4. How much would your stock immediately increase in value as the result of a 2-for-1 stock split? A. 50 percent B. 0 percent C. 100 percent D. None of the above

5. When interest rates go up, bond prices A. Increase B. Fall C. Are not affected by interest rate moves D. Stay the same

Answers: 1. A Common stocks as measured by the Standard & Poor's 500 have outperformed other investment categories between 1926 and 1997. Of course, your investment professional can help you determine if stocks are a suitable investment for your portfolio.

2. C Municipal bond interest is exempt from federal income taxes but may be subject to state and local income taxes, and the alternative minimum tax.

3. D Individuals can contribute up to $2,000 while married couples can contribute up to $4,000 combined (up to $2,000 per account), subject to IRS income limitations.

4. B A stock split doesn't change the dollar value of the position you hold in the stock.

5. B An inverse relationship exists between interest rates and bond prices. In other words, bond prices fall when interest rates go up and increase when interest rates go down.

Scoring. If you answered zero to one question correctly, your investment knowledge is below average. Your investment knowledge can be considered average if you answered between two and three questions correctly.

A score of five correct answers means you have a good foundation upon which to build your investment knowledge.

It is up to you to determine how much financial advice to seek in handling your investments. Put your investing skills to the test before the time comes to make a major investment decision that could profoundly affect your financial future.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)

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