Stock Market Basics Part 2 Trivia Quiz

Answer: Alternative Investment Market

AIM was launched in 1995 with the intention of allowing smaller companies to sell shares to the public but with a less rigid regulatory system than that normally required within the main stock market. The regulatory model is based on a comply-or-explain principle which allows companies which are listed on AIM to either comply with the relatively few rules, or explain why it has decided not to comply.

Answer: In the belief that the price will fall

Short selling a stock is a tactical market ploy used by traders when they think the price will fall for any reason. It involves borrowing stock from someone (with the promise to give it back on a specific date), selling the stock immediately and then hoping to buy back on the market at a price less than the current market price. The "borrowed stock" is then given back to the owner with the difference being the profit generated. It can go spectacularly wrong if the price of the stock actually rises.

The three wrong answers would generally be bad news for a short seller.

Answer: Sell a stock at a fixed price or do not sell at all

A "fill or kill" trade is normally used where the stock owner believes the stock is worth more than the current market price. If that price is not obtained immediately the order is withdrawn. A "limit sale" is similar in that a price is set for the sale but the order left open until the price is reached.

A "market sale" is executed at the current market price and in most cases the trade is immediate.

Answer: waterproof boots / ice cream

"Hedging" involves creating an investment portfolio which should offset some risk should one sector of the portfolio suffer. This normally involves selecting stock which will react differently to market news or world events. In my example, a hot summer would benefit ice cream makers but in the event of a wet summer it is likely that ice cream sales would suffer. To "hedge" this risk I would also invest in waterproof boots which should be a good seller in a wet summer.

Answer: Balanced Managed Fund

Balanced Funds aim to spread the investment risk between all sectors of the stock market including equity, fixed income, property and cash assets. Individual risk is minimized by co-mingling funds with other investors. There are no underlying guarantees and therefore the value of the fund can fall as well as rise.

Answer: Asia

Barings Bank (founded 1762) was one of the oldest merchant banks in London until its collapse in 1995. Speculating primarily with "futures contracts" Nick Leeson lost £827 million on the Japanese and Singapore markets.

Answer: Bond issue

A bond issue involves the sale of financial instruments, usually to institutions, which have a guaranteed rate of interest payable. No further equity shares are issued. A stock buy back would reduce shares in circulation but at the expense of company capital. The other two options would result in additional equity shares being issued.

Answer: A scandal on the London Stock Exhange during the early 1700s

A complex network of intersecting financial, legal, political, and cultural factors all contributed to the development of the South Sea Bubble. The end result was the collapse of the South Sea Company in 1720. Financial ruin for many followed in its wake. Essentially, investors were conned into placing money in the company with promises of huge returns which could never materialize.

The bubble burst, the company went bust and so did many other people and institutions.

Answer: Bid / Offer Spread

The difference between the buy (offer) price and the sale price (bid) allows the dealer to make a profit. The "spread" is usually determined by the volume of the stock being traded. In some cases (usually thinly traded stock) the spread can be manipulated to encourage buyers or if the stock is in short supply, sellers.

Answer: Trading stock for my own gain using confidential information

Examples of "insider dealing" might include a director buying stock in his/her own company knowing that the company was to become the target of a takeover bid. Conversely the finance director, after finding out that the annual results would be poor, before this information was released to the market, sell his/her own stock.