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The US stock markets: 45 questions and answers

The questions from the The US stock markets course, each with the correct answer and a short explanation. Learn the topic step by step in the Unicorn Academy app.

1. What a share is

What does a share represent?

A unit of ownership in the company Whoever buys a share becomes an owner, not a creditor.

What does the price of a share mainly depend on?

Investors' expectations of future profits The price reflects how much the market is willing to pay for expected profits.

In a bankruptcy, when are shareholders repaid?

After the creditors, with what is left Shareholders are last in line: debts are paid first.

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2. The exchanges: NYSE and Nasdaq

Which market was founded in 1971 as the first fully electronic stock market?

Nasdaq Nasdaq introduced electronic trading in 1971.

What is a ticker?

The code that identifies a listed security Every listed security has a short code that identifies it.

What must brokers do when they execute an order?

Seek the best execution for the client The rules require seeking the best terms among the available venues.

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3. Who supervises: SEC and FINRA

When was the SEC set up?

In 1934 The SEC was created in 1934, after the crash of 1929.

What is insider trading?

Using confidential information to profit on the market It is the unlawful use of non-public information to trade securities.

What is BrokerCheck for?

Checking a broker's registration and record It is FINRA's free service for checking brokers and firms.

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4. Trading hours and the session

What are the hours of the regular session, New York time?

From 9:30 am to 4:00 pm The regular session runs from 9:30 am to 4:00 pm on business days.

What characterises trading outside regular hours?

Lower volumes and wider price gaps With fewer participants liquidity falls and prices move more.

Why is the closing price important?

Because it is used to calculate indices and the value of funds It is the day's official reference for indices and funds.

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5. From order to settlement

What is meant by the settlement of a trade?

The delivery of the shares and the money to the two parties Settlement completes the trade with the transfer of securities and money.

What does the T+1 rule, in force since 28 May 2024, provide?

Settlement on the next business day T+1 means one business day after the trade date.

What is the role of the clearing house?

Guaranteeing that trades are completed It stands between the parties and reduces the risk of default.

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6. The indices: S&P 500, Dow Jones and Nasdaq-100

Which index is the most widely used benchmark for the US market as a whole?

The S&P 500 The S&P 500 covers about five hundred large companies from all sectors.

How is the Dow Jones weighted?

By share price In the Dow Jones the stock with the highest price weighs the most.

What does weighting by market capitalisation imply?

The largest companies weigh more in the index A few very large companies can drive the index's performance.

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7. Market capitalisation and free float

How is market capitalisation calculated?

Share price times the number of shares outstanding It is the stock market value of the whole company.

What generally characterises small caps?

Wider moves and lower liquidity Small companies are usually more volatile and less traded.

What is the free float?

The shares actually available for trading It excludes shares held by long-term shareholders and executives.

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8. ETFs and index funds

What does an index fund do?

It tracks an index by buying the securities that make it up It does not select: it tracks the benchmark index.

In what way does an ETF resemble a share?

It is bought and sold on an exchange during the session An ETF is a listed fund, tradable in real time.

Which risk remains with a diversified ETF?

The risk of the market the ETF tracks If the tracked market falls, the ETF falls too.

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9. Dividends and share buybacks

Is the dividend compulsory?

No, it is decided by the board of directors It can be reduced or suspended by the company.

What usually happens to the price on the ex-dividend date?

It falls by an amount close to the dividend Those who buy from that day no longer receive the dividend, and the price adjusts.

What effect does a share buyback have?

It reduces the number of shares outstanding With fewer shares, each one represents a larger stake in the company.

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10. Stock splits

What happens in a two-for-one split?

Each share becomes two shares of half the value The number of shares doubles and the unit price halves.

Does a split change the total value of the shareholder's position?

No, only the number and price of the shares change It is an accounting operation: the cake is the same, cut into more slices.

What is a reverse split?

The merging of several shares into one with a higher price It is the consolidation, the opposite of a split.

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11. The mandatory filings: 10-K, 10-Q and 8-K

What is the 10-K?

The annual report filed with the SEC It is the annual document with audited statements and a description of risks.

When is an 8-K filed?

When a material event occurs It serves to inform the market immediately of important events.

Where can these documents be found free of charge?

In the SEC's EDGAR database EDGAR is the public, free archive of company filings.

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12. Revenue, profit and earnings per share

What is net profit?

What is left after costs, interest and taxes It is the final result after all cost items.

How are earnings per share calculated?

Net profit divided by the number of shares EPS expresses the profit attributable to each single share.

What does the margin indicate?

How much of revenue becomes profit It measures how efficiently revenue is turned into profit.

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13. The price/earnings ratio

What does the price/earnings ratio measure?

How much the market pays for each dollar of profit It is the share price divided by earnings per share.

What does a high P/E usually indicate?

That the market expects strong profit growth A high multiple builds in growth expectations, which may or may not come true.

What does it make sense to compare a company's P/E with?

Similar companies and its own history Multiples vary a great deal from one sector to another.

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14. Earnings season

What does the market mainly react to after quarterly results?

The difference between results and expectations What counts is the gap from what the market expected.

What is guidance?

The company's indications about future results It is the forecast the company provides for the following periods.

What are announcement days like for the individual stock?

Among the most volatile New information can move the price a great deal.

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15. The IPO and the primary market

What is an IPO?

The first sale of shares to the public with a listing on an exchange It is the initial public offering.

Which document is filed with the SEC before the IPO?

Form S-1 The S-1 is the prospectus with financial statements, business and risks.

Where does trading take place after the first day of listing?

On the secondary market, among investors On the secondary market the company no longer receives money: shares pass between investors.

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