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Thursday, May 12, 2011

A simple stock market quiz for new investors

Many new investors get attracted to the stock market because they hear stories from friends about the large sums of money that can be made easily. So they jump into the market without doing adequate homework – usually when the market has already risen significantly. No wonder they stare at huge losses when the market suddenly turns around and starts heading south.

If you have entered the market already – or thinking about doing so – take a simple, multiple-choice stock market quiz and find out how much learning is required before you can think of making any money from buying and selling stocks. Use the ‘comments’ link below the post to provide your answers (e.g. 1(a); 2 (b); 3(c); and so on. Please choose only one answer from the five choices provided for each question.)

A simple stock market quiz

Q1. You buy 200 shares of a unknown small-cap stock for Rs 50, based on a tip from a colleague. A few days later the stock falls to 40. What would you do?

(a) Wait for it to fall more so you can buy more; (b) Start buying more; (c) Sell 100 shares and hang on to the balance 100; (d) Sell all 500 and cut your losses; (e) Wait for the stock’s price to climb back to 50 so you can sell without making a loss

Q2. You buy 50 shares of a well-known large-cap stock for Rs 200. A few days later the stock falls to 180. What would you do?

(a) Wait for it to fall more so you can buy more; (b) Start buying more; (c) Sell 25 shares and hang on to the balance 25; (d) Sell all 50; (e) None of the above, because as a small investor buying expensive large-cap stocks doesn’t make sense

Q3. You buy 100 shares of a well-known mid-cap stock for Rs 100. Soon afterwards, the stock starts to fall – slowly at first, followed by a sharp vertical drop - on good volumes - to 50, before it bounces up to 60. You are caught unawares. What would you do?

(a) Start buying more to ‘average out’ your cost price; (b) Wait for it to fall below 50 before starting to buy; (c) Wait for the stock to find a bottom and buy after the stock starts to move up; (d) Sell all 100 and cut your loss; (e) Wait for the stock’s price to climb back to 100 so you can sell without making a loss

Q4. You have identified a cheap stock that has been trading in a range between Rs 8 – 12 for the past 6 months. You buy 1000 shares at Rs 10 hoping to make some quick money. Within a month, the stock breaks out of the range and starts rising. What would you do?

(a) Sell all 1000 shares when the price reaches Rs 15; (b) Wait to sell all 1000 only when the stock price hits 20; (c) Wait to sell 500 shares at 20 so that your original investment is recovered, and the balance 500 becomes ‘free’; (d) Sell 200 shares every time the stock’s price rises by Rs 3; (e) Plan to sell all 1000 as soon as the stock reaches Rs 18

Q5. You have bought 200 shares of a good mid-cap stock at Rs 50. It rises slowly to 60 before dropping to 55; it then rises to 70 before dropping to 60; the next move takes it to 85 before dropping to 70; then on a sharp volume spurt, the stock reaches a 52 week high of 100. What would you do (you may need paper and pencil to answer this question)?

(a) Buy more at the minor bottoms of 55, 60, 70; (b) Buy more only at 60 and 70; (c) Sell all 200 shares at 100; (d) a combination of (a) and (c); (e) a combination of (b) and (c).

Time to put on your thinking caps and give this simple quiz a shot. Please don’t bother too much about ‘right’ or ‘wrong’ answers. The options you choose will give you some insight into how market-savvy you are.

Please feel free to provide the logic behind your choices – but it is not mandatory to do so. Needless to say, the best answer(s) will be duly acknowledged in next Thursday’s (May 19) post.

8 comments:

Jalal said...

Q1(c); Q2(a); Q3(C); Q4(d); Q5(d)

Subhankar said...

Due to maintenance issues in blogger.com, comments and posts on May 12, 13 '11 were deleted. I'm pasting three reader comments below:

Karan Kamdar:

1) d . Since it was a tip and there is no means of knowing whether the stock will rising again (personally i dont trade on tips)
2) a . Assuming by well known you mean a company with good fundamentals, otherwise if well known means something like suzlon then sell all.
3) c . Same assumption as above and same logic but it would be better if the stock finds a bottom before you start averaging.
4) a . 50 % is a decent return you shouldn't be greedy lest you lose all since it is a risky trade.
5) d . If it is a good script you should always average up and 100 seems to be a decent price.

saurabh:

1 a 2 a 3 b 4 d 5 e

VJ:

1(d) ... Though the option mentions 500 shares instead of 200 by error I presume
2(e)
3(c)
4(d)
5(a)

satvinder said...

Hi,
Sir I am in the mkt. since last 4 years. My answers are
1 d
2 a
3 c But I'm not sure how should i come to know when it had bottomed out.

4 d
5 No option suits my style. I'll sell on rise in 2 to 3 parts and usually be out of stock before it reaches 52 weak high.
These are the answers based on my feelings and lessons learned in the past 4 years. They may be wrong.

Thanks
SATVINDER

venkat said...

Q1-d,Q2-d,Q3-d,Q4-d,Q5-b

Titu said...

Hello Sir,

Q1. Ans. D, as I purchase this stock on tip(Also it is UNKNOWN SMALL CAP), I don't have much confidence in it, so I will sell and book loss.

Q2.Ans. A or B, mostly large cap stock in long run gives nice returns so I will keep adding on dips.

Q3.Ans. C, so I will buy more at lower price and average my price.

Q4. Ans. D, In reality I will use trailing stop loss but that option was not given here, so I will use option D something like SIP.

Q5. Ans. D, Mostly I will sell only 100 share at price 100/- so that for other 100 shares cost of holding becomes zero, but that option was not given so I like option D where we buy at 55 also which makes 80% profit.

Thanking you for posting this exercise

-titu

Bharath said...

Bharath

Q1 D
Q2 A
Q3 A
Q4 C
Q5 B

Titu said...

Hello Sir,

I really don’t understand the logic or mathematical part of Question no. 5, so PLEASE can you explain it in Thursday’s post?

Thanking you in Advance…

-titu

Joe said...

Q1 (d); Q2 (a); Q3 (a); Q4 (d); Q5 (e)