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Question 1 of 10

The objective of fundamental analysis is to identify:

  • A Little-known assets that are rarely traded
  • B Assets trading at a price that differs from their real, fair value
  • C Highly volatile assets suitable for short-term trading
  • D Stable, secure assets that are unlikely to move dramatically

Explanation

Fundamental analysts believe that every asset has a real, fair value, towards which the price will naturally gravitate. They look for assets that appear to be trading at a higher or lower value than they should be, aiming to capitalise on this by trading before a price correction occurs.

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Question 2 of 10

Which method do most fundamental analysts tend to use?

  • A A top-down approach, starting with the wider picture
  • B A bottom-up approach, starting with the fine detail
  • C A mathematical approach, analysing chart data and trends
  • D A retrospective approach, looking for past movement patterns

Explanation

Unlike technical analysis, which focuses on price data and patterns, fundamental analysis takes a holistic view of the circumstances surrounding a market. Analysts usually begin by looking at the wider economic picture, before drilling down into industry sectors. Finally they study individual companies within those industries in detail.

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Question 3 of 10

Which of these factors could be a 'red flag', indicating difficulties that might affect a company's future share price?

  • A A competitor has recently released an innovative product
  • B A country where the company operates has reported poor economic data
  • C There have recently been some abrupt changes in the executive team
  • D Members of senior management have been reducing their shareholdings
  • E All answers are correct

Explanation

There are multiple factors to consider when assessing the health of a company - both in its external environment and its internal operational and management structure. None of the above scenarios would necessarily imply trouble for a business - for example, a competitor's innovation might spur the company to develop a superior product of its own. However, it's important to consider things like this when you form your final opinion.

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Question 4 of 10

Which industry sector is more likely to offer stability for share traders when an economy is shrinking?

  • A Technology
  • B Utilities
  • C Services
  • D None of these sectors

Explanation

Energy and utility businesses tend to be least affected by changes in consumers'' spending power. Even in an economic downturn, people will always need to light and heat their homes, make phone calls and so forth. However, they're likely to cut back on entertainment, travel and buying gadgets or luxury goods. Shares of companies in these sectors could take a hit.

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Question 5 of 10

What does a company's balance sheet show?

  • A Its revenue and profit
  • B Its current size compared to major competitors
  • C Its assets, liabilities and capital
  • D Its growth over a five-year period

Explanation

A balance sheet gives you a snapshot of a company's assets, liabilities and capital at the end of a particular reporting period

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Question 6 of 10

Why might you calculate a company's debt/equity ratio?

  • A To measure its financial leverage
  • B To assess its profitability
  • C To derive the current share value
  • D To determine the likely dividend level

Explanation

The debt/equity ratio is calculated by dividing the company's liabilities by its shareholder equity. This gives you a picture of the level of debt in the business. A high ratio could indicate that the company is financing ambitious growth plans, but also that it may be liable for substantial interest expenses with increased exposure to risk.

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Question 7 of 10

What does it mean when a company is described as having 'high-quality earnings'?

  • A It generates revenue by selling luxury goods
  • B It has shown consistent profits for at least five years
  • C Its cash from operations is higher than its net income
  • D It has very little debt

Explanation

If the figure for a company's cash from operations is higher than its net income, this indicates that a substantial proportion of its earnings are being converted into cash. In other words, it implies that the company is operating efficiently.

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Question 8 of 10

Which of these describes an income statement?

  • A An accounting scorecard illustrating future profitability
  • B A formula to calculate a company's cash holdings
  • C A calculation to forecast revenue for the next five years
  • D A declaration that revenue is from legitimate sources

Explanation

A company's income statement measures its financial performance over a set period. It compares the value of sales made (revenue) with the costs of making them (expenses). If the revenue earned from sales is less than the expenses incurred to make them, the company's business model is likely to be flawed and its future profitability is questionable.

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Question 9 of 10

Which of these are NOT benefits of using fundamental analysis?

Please select all answers that apply
  • It helps you identify long-term trends
  • It develops your business acumen
  • It gives you a deeper understanding of chart data
  • It helps you spot value stocks
  • It's a good way to ensure fast profits

Explanation

Fundamental analysis complements technical analysis, which focuses on chart data, by assessing all the other factors affecting an asset's value. It can help you get a deeper understanding of how businesses work, and so to spot companies that have potential. In general, it's most useful for longer-term traders and investors, since you can't usually predict the timescale before a price movement is likely to occur.

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Question 10 of 10

A company's share price is equal to:

  • A Its debt/equity ratio
  • B Its market capitalisation divided by the number of shares issued
  • C Its market capitalisation divided by its revenue
  • D Its gross profit divided by the number of shares issued

Explanation

Each share is a stake in the overall value of the business - its market capitalisation - so dividing the market cap by the number of shares gives you the share price.

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