LEVEL 1 GLOSSARY
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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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NYSE
The New York Stock Exchange, a.k.a. Wall Street, is where stocks are bought and sold.
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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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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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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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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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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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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.
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
How companies make money
What we'll learn:
1) What costs do a company need to know to calculate profit?
2) What's the difference between an initial cost and a daily cost?
3) Are lemonade stands worth it?
Maybe in some magical land filled with rainbows and lollipops, all companies would be out to help us live happy, productive lives. Alas, in the cold, cruel world we live in, most companies are here to make money.
How do they do this? First, they figure out how much it costs to set up the company. If you're setting up your lemonade stand, you'll have to make signs and buy a chair, a stand, and a pitcher. These are one-time costs.
Then your company needs to tally its daily expenses and figure out how much it will cost to buy the lemons, sugar, water, ice, and cups.
You also have to figure in how much to pay your worker: the guy who pours the cups of lemonade, undoubtedly with a smile on his face.
By adding one-time costs and daily costs, companies determine how much they have to spend to produce a cup of lemonade.
Next, the company has to figure out how many cups of lemonade it needs to sell, and at what price. This is where companies have quite a bit of flexibility.
Let's say the initial cost per cup is $0.20 and you're going to charge $0.50 per cup. That means you make $0.30 for every cup sold.
How many cups of lemonade do you need to sell to pay someone $10 per day to watch the stand?
Do the math — you have to sell 40 cups of lemonade at a $0.30 per-cup profit to make $12, but after paying $10 to the person sitting there, you make $2.
If you make $2 per day and you don't have to work there, that's pretty good.
If it's a hot day and people want lemonade, you can charge more. By charging $1 and selling 20 cups of lemonade, you make $0.80 per cup, or $16 per day.
After paying the person who poured all that lemonade, you're left with $6.
In essence, that's how companies make money — by offering the best product that people want at the right price.
Three Facts to Wow Your Friends at a Party
1) The "Ponzi Scheme" was devised by a New York grifter named William Miller, who bilked investors out of $1 million — nearly $25 million in today's dollars — in 1899.
2) In 2005, 21-year-old student Alex Tew made a million dollars with The Million Dollar Homepage, which was a 1,000 × 1,000 pixel grid where he sold each pixel for $1.
3) Coca-Cola was originally intended as a "patent medicine" when it was invented in the late 19th century by pharmacist John S. Pemberton.
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