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Do you know how to invest? Take this quiz to find out

1) You are planning to buy a house in the next 10 years. The most efficient way to reach this goal is to:
a) Put your money in a bank savings account
b) Invest in the stock market

Correct answer: (b)
Buying a house is a costly affair. Investing in the stock market can help you earn much higher returns compared to a bank savings account. In addition, since this is a long term goal, the risks are also considerably reduced.

2) What is a prospectus?
a) It is a legal document that is issued by companies offering securities for sale
b) It is a document that lists out the future prospects of a company

Correct answer: (a)
A prospectus is a legal document that each company has to issue before at the time of an Initial Public Offering (IPO). It contains important information such as the company’s financial details, its risks, opportunities and future goals.

3) Your friend tells you that investing in stock X will double your returns in 3 months
a) Invest in the stock right away
b) Research the stock carefully before you consider investing

Correct answer: (b)
Unsolicited tips in the stock market are very common. That doesn’t mean they are right. Never invest based on tips. Always do your own analysis before putting your money on a stock.

4) Swati is a risk-averse person. It is better for her to invest in:
a) Mutual funds
b) Stocks

Correct answer: (a)
For a risk-averse investor, it is better to invest his/her money in mutual funds. The returns may not be as high as stocks but they offer greater security to invested capital compared to stocks.

5) The stock market has taken a major downturn. You should
a) Immediately sell all your stock holdings
b) Wait and watch before you take any hasty action

Correct answer: (b)
The stock market can be very volatile. But that does not mean you take out your investment every time the market sees a downturn. If you are a long term investor, it is best to wait and observe why the market crashed. If the reasons are only temporary, you can wait until the market regains its upward momentum.

6) Which of the following is false:
a) Diversifying your investment portfolio helps you minimize your losses
b) Short selling is a process of selling a stock first with the intention of buying it later at a lower price
c) It is possible to predict future price of a stock based on past price movements

Correct answer: (c)
The future price of a stock is not determined by its past performances. As a result, it is not possible to predict a future price based on past patters. That said, it can be useful to study the past performance to gain a better understanding of a stock.

7) Girish wants to create an emergency fund. He should consider investing in:
a) Short term debt funds
b) Stock market

Correct answer: (a)
For an emergency fund, it is best to invest in short term debt funds. These funds offer high returns and they are easily accessible. You can withdraw the money very quickly in case of an emergency. But most importantly, they offer higher degree of capital protection compared to stocks.

8) Geeta is retiring in 5 years. Currently she has 80% of her investments in the stock market.
a) She should retain her investments in the stock market
b) She should slowly transfer her funds to less risky investment avenues

Correct answer: (b)
Investments in the stock market offer high returns. But as a person nears retirement, it is safer to transfer the funds to more stable investment avenues such as debt funds. You don’t want to risk losing a major chunk of your investments when you are about to retire.

9) When you buy a bond issued by a company:
a) You become a part owner of the company
b) You lend money to the company

Correct answer: (b)
When you buy a bond, you are basically lending your money to the company. In return, the company promises to pay you a specific sum of money as interest. And at the time of maturity, the company returns your money.

10) The stock market in India is regulated by:
a) The Reserve Bank of India (RBI)
b) The Securities and Exchange Board of India (SEBI)
c) The Insurance Regulatory and Development Authority of India

Correct answer: (b)
In India, SEBI is the designated financial regulator body. It enforces regulation in the investment markets and maintains an efficient and stable environment in the financial markets.

Final score:
How did you score?
0-3: you may want to brush up on your knowledge on investments
4-6: Good start. You do have a fair bit of knowledge about investments. But try reading more on the subject to become an expert investor
7-9: Great going! You are nearly there.
10: Excellent performance. You are now a stock market superstar.

 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.