The stock market is often used as an indicator of the economy’s success. With so much weight attached to it, we must all have a full understanding of how investing works — right? Unfortunately, MagnifyMoney found that most Americans aren’t particularly well-versed when it comes to investing.

In a new MagnifyMoney survey, we discovered that the average consumer would fail a basic investing quiz. From the S&P 500 and Dow Jones to how to maximize your investments, find out how well your fellow Americans scored below — and test your own knowledge while you’re at it.

Key findings

• The average consumer scored an F on MagnifyMoney’s investing quiz. Most answered just four out of 10 questions correctly.
• Most Americans (70%) don’t understand compound interest. Of that group, just over 38% of respondents are familiar with the term, but don’t know how it’s calculated, while more than three in 10 have no idea what it is.
• Baby boomers fared the best on the investing quiz. Still, only 1.36% of boomers (or a mere four out of 294 boomers) got every question right. Boomers’ average score was just under 50%.
  • Gen X scored the next best, averaging a 42% score, followed by millennials with an average score of just under 40% and Gen Z averaging around 37%.
• Meanwhile, millennials performed pretty poorly, not only in comparison to older generations, but against younger Gen Zers, too.
  • Compared to older consumers, millennials are less likely to know what the S&P 500 is and slightly less likely to know that purchasing a stock means you’re a partial owner of the company (although they scored better than the Silent Generation on that question).
  • Millennials also lost out to all other generations when asked whether all stocks pay dividends to investors — 61% of millennials answered the question incorrectly, versus 49% of Gen X, 37% of baby boomers, 26% of the Silent Generation and 51% of Gen Z.
• More Gen Z-ers correctly identified how a company’s share price is determined than respondents in all other generations. Gen Z had the answer right the most (38.10%), with baby boomers not far behind (at 37.80%). Meanwhile, about 34% of millennials answered correctly, alongside less than 31% of Gen X and just under 30% of the Silent Generation.
• Even investors themselves failed to understand key investing concepts. The survey revealed that about 16% of respondents with an investment account don’t know what compound interest is, and roughly half falsely believe that all stocks pay dividends to shareholders.
• Men showed a stronger grasp of investing knowledge than women. On average, our male respondents scored around 49%, while our female respondents scored 38%.
  • Female respondents were nearly twice as likely as males to not know what compound interest is. Men also knew more about writing off long-term investments when filing taxes, as well as how share prices are determined.

How did investors fare?

A subset of our quiz respondents already have an investment account, such as a brokerage account, 401(k) plan, IRA or 529 account. But that doesn’t mean they scored well:

• For starters, 16% of investors say they don’t know what compound interest is, and another 43% know the term, but don’t know how it is calculated.
  • Nearly half of consumers without investment accounts don’t know what compound interest is (if they did, maybe they would open an investment account and get their money growing!).
• Over half of investors could not correctly identify the S&P 500 or the Dow Jones.
  • About 32% answered incorrectly about the S&P 500, while 25% admitted they weren’t sure what it was.
  • Additionally, close to 10% of investors admitted they weren’t sure what the Dow Jones is, while nearly 3% thought the Dow Jones was an investing-related podcast.
• More than half of investors are unsure how a company’s share price is actually determined. Among the incorrect answers, 16% think it’s set by the New York Stock Exchange, 11% chose the Federal Reserve and 10% by the company’s board. About 21% didn’t even hazard a guess, indicating they weren’t sure of the answer.
• Less than half of investors know that a high P/E ratio means a stock is expected to increase in value. About 21% answered incorrectly, while just over 38% of investor respondents outright admitted they didn’t know the answer.
• When asked how long you must hold a stock for it to be considered a long-term investment for tax purposes, 77% of investors answered incorrectly.
• Investors cut it close when asked whether all stocks pay dividends (a portion of the company’s earnings) to investors. While 50.29% of investors correctly marked it as false, the other 49.71% answered that it was true.

What should I know about investing?

Americans’ low investing IQ could be costing them. Many consumers don’t know how dividends work, how to assess the value of a stock or what the tax implications of long-term investments are — each of which are crucial aspects of maximizing your investments.

• Tellingly, 67% of consumers believe novice investors should focus on timing the market to maximize their investments. However, this isn’t the best practice — especially for beginners — as it is pretty difficult (many experts say impossible) to do.
• Only 17% of consumers know that for a stock to be considered a long-term investment for tax purposes, you must hold it for at least one year. This means the majority of investors could be missing out on investment tax write-offs because they didn’t know it was an option. In fact, close to 35% of respondents with investment accounts weren’t sure what constituted “long-term,” while others thought it took two, five or even 10 years for an investment to be considered long-term.

While it’s important to educate yourself on basic investing topics, you don’t necessarily have to shoulder the whole burden yourself. Some investors are already turning to outside help with their investments, with 37.09% reporting they go to their financial advisors first when they have investing questions. While registered investment advisors (RIAs) were the most popular primary source of information for investors, they were closely followed by online news searches at 36.50%.

Notably, there were generational differences in where investors turn for advice. Baby boomers and the Silent Generation are significantly more likely to turn to an RIA with their investing questions. Millennials, meanwhile, were more likely to go with an online news search, as were Gen Z, although to a lesser extent.

Online searching can only help you so much, though. RIAs can help you to a much greater extent by assisting you with managing your investment portfolio according to your investment goals, risk tolerance and other preferences. They can also help you avoid common investing misconceptions that we’ve discussed.

Beginners may find robo-advisors a great introduction to investing, as they allow you to set your investments according to your preferences. Robo-advisors also offer easy online and on-the-go access so you can easily manage your account.

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Methodology

MagnifyMoney commissioned Qualtrics to conduct an online survey of 1,025 Americans, with the sample base proportioned to represent the overall population. The survey was fielded November 8-12, 2019.

We defined the generations as follows:

• Gen Z is defined as ages 18 to 22
• Millennials as ages 23 to 38
• Gen X as ages 39 to 53
• Boomers as ages 54 to 73

Members of the Silent Generation (ages 74+) were also surveyed, and their responses are included in the overall totals. However, due to a low sample size among this demographic, their responses are excluded from the generational breakdowns.