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
An Interesting Look at Compounding
Now you know all about compound interest and how great it is, but how does it really compare to other kinds of interest?
Well, take a look at the chart above: It shows what you can expect from a $10 investment over 40 years with compound interest vs. simple interest.
Since we're talking stocks, we'll assume our $10 returned an average of eight percent per year. Can you guess which line is which?
If you guessed that compound interest is the blue line, you're spot on. As you can see, the two lines are pretty close at the beginning of the chart, but before long compound interest starts to pull away faster than a Ferrari at a green light.
In our example, simple interest takes your $10 and grows to $42. Not bad... until you see what compound interest does. After 40 years, your $10 is now worth $217.
Simple interest gives you a fixed amount of interest based on the amount of money you have at the beginning.
Compound interest, on the other hand, pays you the same interest rate but on the principal and the interest you've earned.
In other words, compounding pays you according to what you have now, not what you had when you started.
Doesn't sound like a big deal, does it? And that doubling penny from the lesson didn't either — until you saw how much cash you ended up with after a month.
Compound interest is one of those things that may not be easy to wrap your head around, but seeing the chart will likely give you a better idea of how it works and why Einstein thought it was so astounding.
It's also good to keep in mind how time plays a factor: the more time you give compound interest to work, the more money it'll make you. That's why getting your money to work for you as quickly as possible is so important.
Now go out there and get your compounding on.
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