Invest in good businesses with low capital needs
Buffett has long advocated for owning businesses that earn high returns on the capital invested in the business.
7
QUESTION
What is a convertible bond?
INVESTING QUIZ
Essential
Investing Terms
1
An IOU-type bond that does not allow the bondholder to own a piece of the company
A corporate bond that can be converted by the holder into common stock
A variable-income bond that pays interest but cannot be converted into common stock
You don’t need to know all the terminology before you start investing, but it’s wise to know a few so you can navigate investments more confidently. This timed quiz is based on 7 essential investing terms every investor should know, derived from the Bankrate.com glossary. You’ll have 30 seconds to decide the right answer to each question before the correct answer is revealed. Let’s test your knowledge!
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ANSWER 1 of 7
1
Convertible bonds are a hybrid of straight corporate bonds and common stock. Like a corporate bond, convertible bonds offer the investor guaranteed income in the form of interest accrued from the initial investment. Convertible bonds provide a reliable income with guaranteed payments and give the investor the option to take part in the profits of the company.
Correct answer: B
OF 7
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QUESTION
OF 7
2
What is preferred stock?
A popular type of stock that investors prefer instead of bonds
A rare and expensive type of stock that ensures priority payment for shareholders
A kind of stock that provides shareholders with favorable tax treatment
A
B
C
A
B
C
ANSWER 2 of 7
1
Preferred stock is a type of stock that offers different rights to shareholders than common stock. Preferred stockholders receive regular dividends and are repaid first in the event of a bankruptcy or merger. However, unlike common stock, they don’t usually come with voting rights. In that sense, preferred stock is a way to entice early investors without jeopardizing the mission of the company’s owners.
Correct answer: C
DEEPER DEFINITION:
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QUESTION
OF 7
3
What are capital gains?
C
Taxable income earned by an organization
Profits made from the sale of real estate, investments, and personal property
A
Income a corporation pays from its profits to its stockholders
B
ANSWER 3 of 7
Capital gains are profits made from the sale of real estate, investments, and personal property. Although many people associate the term with stocks and bonds, capital assets are anything an individual owns and uses for personal and investment purposes. This includes houses, furniture, coin collections, precious metals, and jewelry. According to the IRS, taxpayers must report and pay taxes on all capital gains.
Correct answer: A
DEEPER DEFINITION:
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QUESTION
OF 7
4
What are options?
A
Investments in a company that represent shares of ownership
Contracts in which an investor has the right to buy or sell a tradable asset at a specified price and time
B
Contracts that give investors the option to borrow or lend their shares
C
ANSWER 4 of 7
1
An option is a derivative contract in which an investor has the right, but not the obligation, to buy or sell a tradable asset at a specified price and time. Investors use options to manage risk, to speculate, and to obtain leverage. They are derived from an underlying asset — usually stock, although they are also used to trade currencies, bonds, and ETFs, among other securities.
Correct answer: B
DEEPER DEFINITION:
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QUESTION
OF 7
5
What is a derivative?
A
Any underlying financial asset that fluctuates in price, such as a stock or a bond
A financial instrument whose value is derived from an underlying asset, commodity, or index
C
An asset that is hard to sell or purchase because it isn’t traded on major secondary markets
B
ANSWER 5 of 7
1
At their simplest, a derivative contract is a deal between two parties to exchange the underlying asset if the price of the asset achieves an agreed-upon level at some point in the future. These contracts are “derived” from an underlying asset such as a stock, bond, index or commodity. Futures, options and swaps are common derivatives.
Correct answer: C
DEEPER DEFINITION:
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QUESTION
OF 7
6
What is EBITDA?
C
An acronym referring to a stock’s most recent exchange price
An acronym describing a way to measure a company’s profitability
A
An acronym for the average price of the top-30 traded securities
B
ANSWER 6 of 7
EBITDA — earnings before interest, taxes, depreciation, and amortization — is a measure of a company’s profitability. As the acronym suggests, EBITDA represents a company’s net earnings before subtracting expenses from interest payments, taxes, depreciation, and amortization. This accounting concept is a proxy for cash flow, or how much a company earns from operations and present assets.
Correct answer: A
DEEPER DEFINITION:
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QUESTION
OF 7
7
What is the prudent investor rule?
C
A government limitation on the purchase and sale of currency
A legal guideline for trustees of investment portfolios
A
A law created to protect investors and reduce fraud in the securities market
B
ANSWER 7 of 7
The prudent investor rule is a legal guideline for trustees of investment portfolios. It requires a fiduciary to act in the best interest of the trust’s beneficiaries and outlines standards for legally controlling investment portfolios. The prudent investor rule is very influential in the courts, the U.S. government, and the banking industry.
Correct answer: A
DEEPER DEFINITION:
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RESOURCES
Learn more about the prudent investor rule
RESOURCES
Understanding essential investing terms could help you make the right decisions for growing your portfolio. With a little research, you can become fluent in investing terminology in no time — and a smarter investor in the process. Read detailed definitions of each investing term by clicking on the corresponding infographic below!
Correct answer: A
DEEPER DEFINITION:
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RESTART QUIZ
What are convertible bonds?
What are convertible bonds?
What is preferred stock?
What is preferred stock?
What are capital gains?
What are capital gains?
What are options?
What are options?
What is a derivative?
What is a derivative?
What is EBITDA?
What is EBITDA?
What is the prudent investor rule?
What is the prudent investor rule?
Learn more about derivatives