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
Function of a bank
What we'll learn:
1) What is the function of a bank?
2) How to get $5 for free — plus a keychain
3) How banks make money
OK, let's get the obvious point out of the way: A bank is something that holds your money and keeps it nice and cozy.
But why do banks exist? Well, they're not some benevolent entity that's just out to keep your money safe. They're out to make money, just like every other company. How do they do that?
They take your money and lend it to somebody else, and then they make money on it.
Banks say they're holding it for you and even "guarantee" you'll get it back. But what they actually do is take your money, lend it to somebody else, and charge that person an interest rate. It's called a loan, and they do it all the time.
See, a bank says, "You've got $100 in your piggy bank. Why don't you put that money in our bank? At the end of the year, we'll give you five percent interest."
Now you have $105 — and here's a free keychain, to boot! That's not a huge amount of money, but it's better than only getting $100 back, right? Right. You've made $5 off the bank, and that's pretty smart.
But where does the bank get that extra $5?
What they do is take your $100 and lend it to somebody who's likely to pay it back: They lend it to somebody who's going to build a school, start a business, or buy a home.
These buyers and builders are willing to pay the bank $10 for a $100 loan. They tell the bank, "I'll pay you back $110 in a year if you lend me $100 right now." You give the bank $100, and they give you back $105 — the bank keeps the remaining $5.
That's the only thing that banks do — they lend the money and get back more than what they lent. But is putting your money in a bank the best way to make it work for you? Well, that's for you to decide.
Three Facts to Wow Your Friends at a Party
1) The word "bank" derives from the Italian word banco, which means "desk" or "bench." This furniture was used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.
2) The largest cash robbery of a bank was the Loomis Fargo bank robbery in 1997, in which $17.3 million was stolen from a regional office vault in Charlotte, NC. Note to potential thieves: The bad guys were caught, and 95 percent of the money was recovered.
3) Banks began giving away toasters to attract new customers after the Great Depression.
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