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Where to start in finance

New to finance, or rusty? This check starts in the middle and moves up or down with your answers: six to nine quick questions, about three minutes. It tells you which of the three levels you can already handle and where to start. Don't look anything up: a wrong answer just tells us where to begin.

The three levels: Run your own money (interest, inflation, comparing offers), Invest on your own (low-cost funds, fund costs, sales pitches) and Judge a company (reading accounts, simple valuation).

Studying on your own for the first time? The short How to study path shows methods that make every subject easier.

Quick placement check

Tap the answer you think is right.

You save 1,000 at 10% a year and leave the interest in. What do you have after 2 years?
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1,210. 1,000 → 1,100 → 1,210. The second year earns interest on the first year's interest.
Which is worth more today, if you can earn 5% a year in the bank?
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1,000 today. Money today can earn interest, so 1,000 later is worth less than 1,000 now.
A price index goes from 100 to 104. What was inflation?
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4%. Inflation is the change in the index: (104 − 100) ÷ 100 = 4%.
Your savings earn 2% while prices rise 3%. What happens to what your money can buy?
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It shrinks a little. The real rate is about 2 − 3 = −1%.
Before costs, what do all investors together earn?
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The market's return. Together they own the whole market, so they share its return; costs then come out of it.
A company has assets of 500 and liabilities of 200. What is its equity?
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300. Assets = liabilities + equity, so equity = 500 − 200.
What does an index fund that tracks a whole stock market do?
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Holds the shares in the index, in proportion, and mostly keeps them. An index fund simply owns the market it tracks and trades as little as it can.
Two funds hold the same kind of shares. One costs 0.1% a year, the other 1.5%. Which is more likely to leave you with more after 20 years?
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The 0.1% fund. Costs are the one thing you know in advance, and they compound every year.
An advert says a fund was the top performer of the last three years. What does that tell you about the next three?
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Little: top funds rarely stay on top. Past winners usually drift back towards the average; a short record is mostly luck and timing.
A company earns 10 million and has 5 million shares, which sell at 30 each. What is its price/earnings ratio?
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15. Earnings per share are 10 ÷ 5 = 2, and 30 ÷ 2 = 15.
A company's profit before interest and tax is 60, and the interest it owes this year is 12. How many times is its interest covered?
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5 times. Interest cover is 60 ÷ 12 = 5: profit could fall a long way before interest went unpaid.
You estimate a share is worth 50. It sells for 35. What is your margin of safety, as a share of your estimate?
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30%. (50 − 35) ÷ 50 = 30%: your estimate could be 30% too high before the price exceeded the value.

Your path through Finance

Each leaf is one lesson. Leaves fill in as you finish lessons (saved only in this browser). Each level ends with a self-test.