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
What is a stock?
What we'll learn:
1) What is stock?
2) Why should you buy stock?
3) Why does a company issue stock?
So you know what brands, companies, and banks are. Great! But what the heck is stock, and why would you want to buy stock rather than the stuff a company makes? Easy. You want to make money. Who doesn't?
And why do companies issue stock in the first place? Well, for pretty much the same reason.
OK, let's bring this down to a more personal level. Let's imagine you're back in early America, and you've got a friend named Betsy Ross. (Years from now she'll be in all the history books, but that's a ways off yet. For now, she's just your pal Betsy who spends all of her time knitting.)
Betsy comes to you asking for money to start her flag business. She needs to buy yarn, thread, needles, and a comfortable chair to knit in, and hire a sewing staff.
Now, you could lend her the money, and she would pay you back — maybe with a little interest on top. Easy enough. Or you could buy a portion of the Betsy Ross company — essentially becoming a partner in the company — and get paid back by part of the profits from sold goods.
This means that every time she sells a flag, you get a small piece of the sale. That is buying stock.
A stock is a physical piece of paper that says you own a number of shares of the company, and that you are in partnership with that company.
And here's the thing: If you believe Betsy's company is viable and has a promising future, then you'll likely make a bigger return off your money by owning a part of the company, as opposed to getting a fixed return from lending her the money.
So you get something out of it, and so does Betsy: Maybe she couldn't get money from a bank, or maybe she didn't want to have to pay back the loan with interest.
If banks won't lend her the money or Betsy doesn't want to be weighed down with debt, then Betsy's company will need to raise money from elsewhere...i.e., you.
By extending shares, companies bring in money from stockholders in exchange for a right to a part of the profits.
But here's the trick: How do you get your money back on the stock? The company might pay quarterly dividends. Otherwise you can sell your shares either back to the company or to another investor.
A good investor is able to recover his initial investment and capitalize on the profitability of a company as long as he holds the stock.
Three Facts to Wow Your Friends at a Party
1) Scripophily is the study and collection of stocks and bonds.
2) Open outcry is the name of a method of communication between professionals on a stock exchange, which involves shouting and the use of hand signals to transfer information about buy and sell orders.
3) The oldest stock exchange on record was created in Antwerp, Belgium, in 1460.
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