Equity Instruments: Stocks, Shares, and Other Investments

Question 1

Which of the following is NOT a characteristic of equity instruments?

Accepted Answer

They are not freely transferable.

Answer

They are typically issued by companies.

Answer

They represent ownership in a company.

Question 2

What is the primary reason for companies to issue equity instruments?

Accepted Answer

To raise capital for business operations.

Answer

To provide investors with a tax advantage.

Answer

To increase the company's credit rating.

Answer

To reduce the company's debt burden.

Question 3

Which of the following is NOT a type of equity instrument?

Accepted Answer

Bonds

Answer

Preferred stock

Answer

Common stock

Answer

Warrants

Question 4

Which of the following factors is most likely to have a significant impact on a stock's price?

Accepted Answer

Company earnings and financial performance

Answer

Political stability

Answer

Interest rates

Question 5

What is the primary function of equity markets in a modern economy?

Accepted Answer

To facilitate the raising of capital for businesses and provide investment opportunities for individuals.

Answer

To set the prices of goods and services.

Answer

To regulate the banking system.

Question 6

Which of the following is NOT a potential risk associated with investing in equity instruments?

Accepted Answer

Guaranteed returns

Answer

Volatility

Answer

Interest rate changes

Answer

Inflation

Question 7

What is the primary role of a stockbroker?

Accepted Answer

To execute buy and sell orders for stocks on behalf of clients.

Answer

To provide financial advice.

Answer

To underwrite new stock issues.

Answer

To manage investment portfolios.

Question 8

Which of the following is a potential benefit of owning equity instruments?

Accepted Answer

Potential for capital appreciation

Answer

Guaranteed income

Answer

Tax exemption

Answer

Low risk

Question 9

Which of the following is a key characteristic of equity instruments?

Accepted Answer

Represent ownership in a company

Answer

Have a fixed maturity date

Answer

Are secured by collateral

Answer

Provide fixed income payments

Question 10

What is the process by which companies issue new shares to raise capital called?

Accepted Answer

Initial Public Offering (IPO)

Answer

Rights Issue

Answer

Secondary Offering

Answer

Share Repurchase

Question 11

Which of the following methods is commonly employed to value equity instruments?

Accepted Answer

Dividend Discount Model (DDM)

Answer

Payback Period Analysis

Answer

Net Present Value (NPV) Analysis

Answer

Internal Rate of Return (IRR) Calculation

Question 12

What is the primary role of the stock market in relation to equity instruments?

Accepted Answer

Provides a platform for buyers and sellers to trade shares

Answer

Only allows large financial institutions to participate

Answer

Guarantees a profit on investments

Question 13

Which type of equity instrument confers ownership rights and carries voting privileges?

Accepted Answer

Ordinary Shares

Answer

Bonds

Answer

Preference Shares

Answer

Derivatives

Question 14

What is the term used to describe the proportion of a company's earnings distributed to shareholders?

Accepted Answer

Dividend yield

Answer

Capital gain

Answer

Interest rate

Answer

Earnings per share

Question 15

Which of the following factors can influence the value of equity instruments?

Accepted Answer

Macroeconomic conditions

Answer

Weather patterns

Answer

Personal preferences

Answer

Astrological events

Question 16

What is the term used to describe the unique risk associated with equity investments?

Accepted Answer

Equity risk premium

Answer

Interest rate risk

Answer

Currency risk

Answer

Liquidity risk

Question 17

Which of the following is a potential benefit of investing in equity instruments?

Accepted Answer

Potential for significant capital appreciation

Answer

Immediate liquidity

Answer

Low risk

Answer

Guaranteed income payments

Question 18

What is the term used to describe an investment portfolio that includes a mix of asset classes, such as equity instruments?

Accepted Answer

Diversified portfolio

Answer

High-growth portfolio

Answer

Concentrated portfolio

Answer

Balanced portfolio

Question 19

Which of the following is a fundamental characteristic of an equity instrument?

Accepted Answer

Represents ownership in a company

Answer

Guarantees a fixed return

Answer

Issued for a short-term period

Answer

Secured by collateral

Question 20

Where are new shares issued and sold for the first time?

Accepted Answer

Primary Market

Answer

Over-the-Counter Market

Answer

Secondary Market

Question 21

Which of the following is NOT a type of equity instrument?

Accepted Answer

Bond

Answer

Preferred stock

Answer

Common stock

Answer

Convertible bond

Question 22

What is a primary advantage of investing in equity instruments?

Accepted Answer

Potential for high returns through capital appreciation and dividends

Answer

Low risk

Answer

Guaranteed income

Answer

Tax benefits

Question 23

What is the primary difference between common and preferred stock?

Accepted Answer

Common stock carries voting rights, whereas preferred stock generally does not

Answer

Preferred stock has a higher dividend rate than common stock

Answer

Common stock is issued in smaller denominations than preferred stock

Question 24

What is the primary purpose of dividends?

Accepted Answer

To provide investors with a return on their investment

Answer

To reduce the risk of investing in equity instruments

Answer

To increase the value of the equity instrument

Question 25

What is the purpose of a stock split?

Accepted Answer

To increase the number of shares outstanding without altering the total market value of the company

Answer

To reduce the number of shares outstanding

Answer

To increase the value of each share

Question 26

Which of the following is NOT a characteristic of equity instruments?

Accepted Answer

Fixed income

Answer

Ownership interest in a company

Answer

Residual claim on assets

Answer

Potential for dividends and capital gains

Question 27

What is the main function of equity instruments in financial markets?

Accepted Answer

Capital formation

Answer

Currency hedging

Answer

None of the above

Answer

Risk management

Question 28

Which of the following is an advantage associated with investing in equity instruments?

Accepted Answer

Higher return potential

Answer

Guaranteed income stream

Answer

Low investment risk

Answer

Tax exemption

Question 29

What is the primary risk associated with equity investments?

Accepted Answer

Market volatility

Answer

Inflation risk

Answer

Foreign exchange risk

Answer

Interest rate risk

Question 30

Which formula is used to calculate the dividend yield of a stock?

Accepted Answer

Dividend per share / Market price per share

Answer

Book value per share / Market price per share

Answer

Earnings per share / Market price per share

Question 31

What is the primary purpose of an initial public offering (IPO)?

Accepted Answer

To raise capital for a company by issuing shares to the public.

Answer

To increase liquidity for existing shareholders.

Answer

To reduce the company's debt burden.

Question 32

A company issues 10,000 shares at £10 each. What is the total amount of capital raised?

Accepted Answer

£100,000

Answer

£1,000

Answer

£1,000,000

Answer

£10,000

Question 33

Which of the following is NOT a characteristic of equity instruments?

Accepted Answer

Guaranteed returns

Answer

Ownership rights in the company

Answer

Voting rights in the company

Answer

Potential for capital appreciation

Question 34

A company's earnings per share (EPS) is £2, and its price-to-earnings (P/E) ratio is 15. What is the current market price of the stock?

Accepted Answer

£30

Answer

£7.50

Answer

£20

Question 35

Which of the following is a type of equity instrument?

Accepted Answer

Preferred stock

Answer

Bonds

Answer

Treasury bills

Answer

Commercial paper

Question 36

A company issues a dividend of £1 per share. If you own 100 shares, how much dividend will you receive?

Accepted Answer

£100

Answer

£1,000

Answer

£1

Answer

£10

Question 37

What is the primary function of a stock exchange?

Accepted Answer

Facilitating the trading of equity instruments

Answer

Issuing new equity instruments

Answer

Regulating the financial industry

Answer

Providing loans to businesses

Question 38

Which of the following investment strategies involves buying and holding equity instruments for the long term?

Accepted Answer

Buy-and-hold

Answer

Swing trading

Answer

Day trading

Answer

Scalping

Question 39

What is a stock split?

Accepted Answer

A division of existing shares into a larger number of shares

Answer

A merger of two companies

Answer

An increase in the company's earnings

Question 40

Which of the following is a risk associated with investing in equity instruments?

Accepted Answer

Market volatility

Answer

Limited growth potential

Answer

Low liquidity

Answer

Guaranteed returns

Question 41

How do investors typically benefit from investing in equity instruments?

Accepted Answer

Capital appreciation and dividend income

Answer

Low risk and high liquidity

Answer

Guaranteed returns

Answer

Fixed interest payments

Question 42

A company issues 10,000 shares at £10 each. What is the total amount of capital raised?

Accepted Answer

£100,000

Answer

£1,000

Answer

£10,000

Answer

£1,000,000

Question 43

Which of the following is NOT a characteristic of common stock?

Accepted Answer

Guaranteed dividend payments

Answer

Potential for capital appreciation

Answer

Voting rights in company decisions

Answer

Residual claim on company assets

Question 44

A company's earnings per share (EPS) is £2.50 and its price-to-earnings (P/E) ratio is 15. What is the current market price of its stock?

Accepted Answer

£37.50

Answer

£2.50

Answer

£15.00

Answer

£6.25

Question 45

Which of the following is a primary market transaction?

Accepted Answer

An initial public offering (IPO)

Answer

A stock purchase on the London Stock Exchange

Answer

A sale of shares between two individual investors

Answer

A repurchase of company shares by the company itself

Question 46

What is the main difference between a stock split and a stock dividend?

Accepted Answer

A stock split changes the number of shares outstanding without affecting the total market capitalization, while a stock dividend distributes additional shares from company earnings.

Answer

A stock split increases the share price, while a stock dividend decreases it.

Question 47

An investor buys 100 shares of a company at £20 per share and sells them a year later at £25 per share. What is the investor's total capital gain?

Accepted Answer

£500

Answer

£200

Answer

£2,000

Answer

£2,500

Question 48

Which of the following is a benefit of investing in equity instruments?

Accepted Answer

Potential for high returns

Answer

Guaranteed income streams

Answer

Low risk compared to other asset classes

Question 49

A company issues preferred stock with a dividend rate of 5%. If the par value of the stock is £100, what is the annual dividend per share?

Accepted Answer

£5

Answer

£50

Answer

£10

Answer

£0.50

Question 50

What is the main role of a stock exchange?

Accepted Answer

To facilitate the buying and selling of publicly traded shares

Answer

To regulate the issuance of new securities

Answer

To provide financial advice to investors

Question 51

Which of the following is a factor that can influence the price of a company's stock?

Accepted Answer

Company earnings and profitability

Answer

The color of the company's logo

Answer

The weather conditions

Answer

The number of employees at the company