Refer to figure.
The operating principles of direct reading compasses are based on the fundamentals of magnetism, in particular the interaction between the magnetic field of a suitably suspended magnetic element, and the Earth’s magnetic field.

The three principle properties of a simple permanent bar magnet are that:
- It attracts other pieces of iron and steel.
- Its power of attraction is concentrated at each end of the bar.
- When suspended to move horizontally, it always comes to rest in an approximately north - south direction.

Magnetism is concentrated at a magnet's extremities, called poles. Therefore, statement 2 is correct.

Additionally, a freely suspended magnetised rod always aligns itself approximately in a north-south orientation. The end that seeks north is called the north seeking or red pole, and the end that seeks south, is called the south seeking or blue pole.

A unit pole cannot exist. If a magnet is cut into two pieces, each piece will have two poles. Therefore, statement 1 is incorrect.