Topic: How To Invest

QUIZ: Learning about stocks for fun—and profit

Successfully learning about stocks means discovering how to do insightful research—but above all, investigating widely, rather than focusing on a narrow range of information

When they’re just starting out, investors learning about stocks need to look at a wide range of information before deciding whether to buy or sell a stock. But too many do the opposite: they focus on a narrow band of information. This may work from time to time, due to the random element in stock price performance. But with investing, deeper research is rewarded.

Take our quiz below on learning about stocks to see how much you already know—and maybe you will learn something new in the process!

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A. Learning about stocks should include:

  1. Using technical analysis
  2. Learning about diversification
  3. Practicing patience with your holdings
  4. All of the above

You are correct if you answered 4.

Use technical analysis to support—not determine—your view of a company. Look at chart readings as one tool among many, but don’t look at the chart for a prediction of what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors. Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stock or exchange-traded funds (ETFs).

Meanwhile, if you lack patience, you run a big risk of selling your best choices in the midst of a temporary downturn, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so at the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

B. Learning about stocks through practice accounts is:

  1. The best strategy out there
  2. A risky choice for investors
  3. Reserved for experienced professionals
  4. None of the above

You are correct if you answered 2.

The online brokerage industry is winning a lot of attention and goodwill for itself by offering “practice accounts.” These accounts are supposed to be identical to real accounts in all but one respect: you trade in them with imaginary or “play” money, rather than the real thing. The industry says this gives would-be traders a free opportunity to learn how to trade online, without risking any money.

The big risk with practice accounts is that you’ll try out a risky and ultimately unwinnable investment approach, like day trading or options trading, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean and deliver losses instead of profits.

C. Favourable financial factors for stocks include:

  1. Manageable debt.
  2. 5 to 10 years of dividends.
  3. A history of 5 to 10 years of profit.
  4. All of the above

You are correct if you answered 4.

When bad times hit, debt-heavy companies go broke first.

Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying stocks, you’ll avoid most frauds. Furthermore, companies that make money regularly are safer than chronic or even occasional money losers.

D. Price targets are important to identify in learning about stocks:

  1. False, because they rely on uncertain predictions
  2. True, when making big investments
  3. True, when making small investments
  4. Sometimes, but only when the price is reasonable

You are correct if you answered 1.

Investors often ask us why we don’t give price targets for the stocks we recommend. After all, stock price targets appear regularly in brokerage and media reports.

There are several very good reasons we do not follow this practice. The main one stems from one of the stock investing tips we have often reiterated: predictions are the least reliable part of the investment decision-making process.

Price targets encourage investors to rely on predictions about stocks. But big bets on predictions or opinions about the future will always produce inconsistent results. That’s why successful investors recognize that predictions are of limited use in investing profitably.

 E. Learning about stocks is most beneficial when:

  1. You make frequent gambles
  2. You use a proven investment strategy
  3. You have a lot of money at your disposal
  4. None of the above

You are correct if you answered 2.

We think it’s more cost-effective to seek safety by following our three-part Successful Investor portfolio management philosophy.

  • First, invest mainly in well-established, dividend-paying companies. When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.
  • Second, avoid or downplay stocks in the broker/media limelight. That limelight tends to raise investor expectations to excessive levels. When companies fail to live up to expectations, these stocks can plunge. Remember, when expectations are excessive, occasional failure to live up to them is virtually guaranteed, in the long term if not in the short.
  • Third, spread your money out across the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). This helps you avoid excess exposure to any one segment of the market that is headed for trouble.

What do you want to learn most about investing?

What do you wish you had learned about investing early in building your portfolio?


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