Answers: Chapter 3 - Investment Basics


3.1: If you own this type of stock, you can help determine the members of the board of directors of the company in which  you have invested.

  1. Preferred Stock

  2. Long-Term Debt

  3. Common Stock

  4. Assets

Correct answer is #3: Common Stock

Common stockholders not only own a piece of the company, but they also vote for the board of directors (the people who are responsible for overseeing the company). This means that common stockholders control the management of the company. Whether or not these investors profit from their investment depends upon how well the company performs. Common stockholders receive dividends – a portion of a company's profit that is distributed to stockholders.

 

3.2: Assume you started your own company by borrowing money from your parents and also investing some of your own money. Which item below represents the total amount of money you put into your company to get it started?

  1. Capital

  2. Equity

  3. Long-Term Debt

  4. Common Stock

  5. Assets

Correct answer is #1: Capital

Capital is the combined total of equity and debt.

 

3.3: An underwriter is:

  1. an individual or company that helps a company with an IPO

  2. an individual who owns common stock

  3. an individual or company that lends or borrows money

  4. an individual who owns preferred stock

  5. assets

Correct answer is #1

Underwriters are hired to help a company during the IPO process. Underwriter typically begin by either:

- buying up all the shares the company wants to offer and then reselling these shares to the public at a slightly higher price, keeping the profit or...

-  buying up the shares from the company and then reselling them to investors, while charging a fee to find buyers for the shares. 

They also perform other duties, such as putting together a prospectus or putting an advertisement for the IPO in publications.

 

3.4: If a company goes bankrupt and all its assets have to be sold off, who gets paid first with the proceeds of the sale? 

  1. Those who own the common stock of the company

  2. Those who own the preferred stock of the company

  3. Those who have lent the company money

The correct answer is #3

A lender's advantage is that she is first in line to recover a loan when things go wrong. A lender's disadvantage is that - unlike the stockholders - she can't make more money even if the company does phenomenally well.