LEVEL 1 GLOSSARY
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Bonds
When you buy bonds, you're basically lending money to municipalities, states, and other government entities, which they use for construction projects and other fun stuff. They then pay you back with interest. These aren’t the biggest money makers, but bonds are fairly stable for those of you who think “risk” is a dirty word.
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NASDAQ
It's known as The National Association of Securities Dealers Automated Quotation System, but suffice to say this stock exchange is one of the biggies.
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Return
Gain (or loss) from an investment. Unless you're fiscally masochistic, you're going to cross your fingers for a gain.
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Revenue
The money generated from sales. If you own a lemonade stand and charge 25 cents per cup, add up all the sales for the day and—voila!—that's the revenue (just to keep you on your toes, sometimes people just refer to this as sales).
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Stock
This is your piece of the corporate pie, and it entitles the holder to a share of assets and earnings.
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Bull Market
Like a bull charging forward, a “bull market” is typically a market on the upswing. Olé!
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Debt
It's a bad word in personal finance, but it's pretty common in the corporate world. This is the money that a company owes to a lender.
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Dow Jones Industrial Average
The grandaddy of them all when it comes to indices only because it’s the oldest and most popular—not the largest or most representative. The Dow only represents the prices of 30 largest and most widely held companies in the U.S.
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IPO
Short for Initial Public Offering, this is a private company's way of saying, "Do you want a piece of this?" This is when a company offers shares to the public to get more dough to grow the business. Also known as "going public."
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NYSE
The New York Stock Exchange, a.k.a. Wall Street, is where stocks are bought and sold.
See full glossary
In Level 1 we'll introduce you to some of the basic concepts of investing. Each concept features a brief description and a case study, so you can see how each concept works in what financial analysts call "the real world." When you've mastered a concept, click the link at the bottom of the page to add it to your Report Card and move to the next one. Master all the concepts in each level, and then take the quiz to see just how smart you are.
- What is money?
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The uses of money
- Function of a bank
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What is a company?
- Is that company any good?
- How companies make money
- Brands
- Stocks vs. bonds
- What is a stock?
- Compounding interest
- What is the market?
- LEVEL 1 QUIZ
Compounding interest
What we'll learn:
1) What is compounding interest?
2) How much is compounding interest actually worth?
You're walking down the street and some mysterious stranger offers you a proposition: He'll give you either a million dollars, or a penny that doubles every day for a month. You think, "Hey, my mom didn't raise no fool! Give me the cool million upfront."
Sorry, but you should have taken the penny. Because at the end of 30 days, you'd have $5,368,709.12. That's a little more than one million dollars, no?
In a nutshell, that's compounding interest, which amazed even Albert Einstein (see Party Facts, to the right).
And if Einstein said it, it must be true, right? But compounding is magical because it makes your money work for you, which is great. But then it takes that money it just made and puts that to work, as well.
This way, every single one of your dollars is out there making more and more. It's all for you, and it's a big reason you should get into the market as early as you can.
So let's look at that again: Say you've got $10,000 you want to put in your bank. The bank is going to pay you 5% interest on your $10,000.
Wow, you've just made $500 after the first year, right? So now the following year, you have $10,500 to put in the bank.
With compounding interest, your $500 becomes $525! Over the course of two years, your money has earned $1,025.
And you'll gain even more interest the next year, because you have more money.
That's why opportunities exist in the market.
If you make the right investments, you could earn 35% off every dollar. And when you compound that, you make even more money.
Compounding interest is very powerful, and it ultimately decides the difference between the wealthy and the not wealthy. The wealthy have figured out how to earn money at a very high rate of return for a long period of time.
The earlier you begin using compounding interest as an income tool, the better off you'll be. Every year counts!
Three Facts to Wow Your Friends at a Party
1) When asked to name the greatest invention in human history, Albert Einstein replied simply, “compound interest.”
2) During one Tonight Show monologue, Johnny Carson quipped, “Scientists have developed a powerful new weapon that destroys people but leaves buildings standing. It’s called the 17 percent interest rate.”
3) Compound interest was severely condemned by Roman law.
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