What’s Your Stock Market IQ? Take This Test

Stock market investing can play a crucial role in your life, especially if you’ll depend on savings to keep you afloat during your retirement years.

The longer we live, the more money we’re going to need. Although stocks are risky, they can provide better returns than other types of investments. Yet, many of us don’t understand the basics of stock investing.

What’s your stock market aptitude? Test yourself with this quiz, and get up to speed at the same time:

True or false: Stocks outperform other investments over the short term.

Pincasso / Shutterstock.comPincasso / Shutterstock.com

This is a tricky question. While stocks outperform many other investments in the long run — say, over 10 years — the shorter the time horizon, the more unpredictable and risky stocks become. So, the answer to this question is false.

Day trading and other forms of short-term investing are far too risky for the average investor and are not a good strategy for your retirement savings.

Over the long term, however, stocks outperform most other investments.

True or false: When companies pay shareholders, it’s called interest.

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False. Payments made to shareholders are typically called dividends, not interest.

When you invest in a stock, you become part-owner of a company. When you buy a bond or put money in a bank account, you’re loaning money. Dividends are payments made to owners. Interest is a payment made to lenders.

Some companies never pay dividends, using the money instead to grow the company. While dividends should never be the sole determinant when buying a stock, they can be a great perk.

Interest, as mentioned above, is money earned by lending money to a bank, company or government agency.

True or False: Most investors should stick with mutual funds actively managed by experts.

Imageflow / Shutterstock.comImageflow / Shutterstock.com

False. The stock market is a place where we often put too much faith in experts. Arguments for managed mutual funds can be persuasive, but the fact is that unmanaged index funds outperform the vast majority of mutual funds actively managed by experts.

The reason unmanaged index funds outperform the experts is simple: The experts actively managing funds charge big bucks for their expertise.

Only a few expert managers outperform the stock market and even they have trouble maintaining their results over time. The famed PIMCO Total Return (bond) Fund offers a good example. Founded and managed by bond “guru” Bill Gross, it produced excellent earnings for many years but lost investors’ money in 2013. Gross left the company, and in 2014 Ford Motor Co. dropped the fund from its employees’ 401(k) offerings.

As Money Talks News founder Stacy Johnson says, “Just buy an unmanaged index fund and be done with it.”

How did you do on the quiz? If you’d like to learn more about investing, we’re here to help. Check out:

How comfortable are you with investing in stocks? Post your comments below or on Money Talks News’ Facebook page.

Stacy Johnson contributed to this post.

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