LEVEL 2 GLOSSARY
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Balance Sheet
This financial statement tells you if the company is in the black (good) or red (bad). The statement details the good, the bad, and the ugly of the company's liabilities, assets and shareholders??? equity. One rule to remember here is a company's assets = liabilities + shareholders' equity.
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Book value
Theoretically, it’s what a shareholder would receive if the company were liquidated or sold for cash today. As we all know, the books don't always reflect the reality.
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Income Statement
One of the three common financial statements that is basically the company's quarterly budget. This is how much the company made and how much it spent, the bottom line (literally) being the profits left over.
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Market maker
A brokerage firm that is willing to sell you a stock (at the bid price) or buy one back from you (the ask price). They play both sides and make money off of each. Brilliant!
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Security
Basically, any contract representing ownership, such as stocks, bonds, options, swaps, notes, and futures. It says, "I OWN THIS"
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Shares Outstanding
The total number of shares currently held by investors.
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Statement of Cash Flows
Do you balance your check book? So do companies, and this is what it looks like. This is one of the three common financial statements compiled by a company. It shows how the company generated cash and where it spent it.
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Value Investing
An investment strategy that relies on picking stocks that are undervalued by the market and hoping that the market catches up at some point.
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Annual report
This report airs the company's dirty laundry with the freshest spin possible. They tell you what happened last year and what the financials look like all in one place, they can usually be found filed with the SEC or on the company website. Companies are required by law to put these out, but don't get fooled by the pretty pictures???the bad stuff is in there too.
See full glossary
In Level 2, we'll take you a little deeper into the trading world. Like in Level 1, there are a series of concepts that you should master before taking the Level 2 quiz. Remember to click the "Mastered this concept?" link at the bottom of the page to keep track of your progress in your Report Card.
- Invest in what you know
- Working at the stock market
- Price of stock
- What affects share price?
- Judging a stock
- The Fair-Price Rating
- Shares outstanding
- Where to learn about a company
- Growth investing
- Value investing
- Invest like Buffett
- The government's role
- LEVEL 2 QUIZ
Growth investing
What we'll learn:
1) What's a growth stock?
2) When should a growth investor buy into a company?
Growth stocks are kind of like fast cars, in that they take off fast and furious. But as you can see from looking at used-car lots, not every fast car is a perfectly tuned Ferrari. If the company hits a roadblock, the stock price is likely to drop because people will sell their stock.
So these stocks have potential, but they're far from sure things. When it comes to growth investing, you want to look for companies that are on the rise. Most companies naturally go through a predictable cycle: they start out small and eventually grow into more established organizations.
Growth investors want to invest in those companies that are in the early (i.e., growth) stage because that's when the stock can grow the fastest. The faster a company grows, the more money investors can make.
OK, let's stop being theoretical here and get real. So you have a lemonade stand. When you first started, you had one stand in your front yard. But business has been good lately, so you decide to get your friend to open one in his front yard, too.
Turns out the neighborhood can't get enough of your lemonade, so you start opening up more lemonade stands in different neighborhoods.
You're growing fast thanks to all the money everyone is making. This allows you to expand, to maybe spend a little more money on uniforms for people working at the stand, and maybe even add a new flavor. (We're partial to strawberry, but that's just us.)
A growth investor would salivate at the prospect of owning your stock because you're in that sweet spot of growth. Years later, once everyone has had their fill of lemonade, your growth might start to ebb, and growth investors will likely move on to the next idea.
So what does a growth stock look like? For starters, most of these companies will reinvest in themselves instead of paying out a dividend.
Whoa, there — a dividend? Reinvesting? Don't worry, we'll cover those in the next level. What we mean is that growth stocks are focused on just one thing: continuing to grow.
Growth investing is a great way to look for stocks — if you do your homework. Just make sure you don't buy a stock you think is a growth stock and it really isn't — you may end up paying a Ferrari price and getting a Yugo.
No offense, Yugo.
Three Facts to Wow Your Friends at a Party
1) After the burst of the dot-com bubble, "growth at any price" has fallen from favor. It is often more fashionable now to seek out stocks with high growth rates that are trading at reasonable valuations.
2) Many investors felt that the unprecedented spike in oil prices in the summer of 2008 was due to speculators trying to ride the growth-investing wave.
3) A company could be a growth stock and not make any money — Amazon (AMZN) until 2001 was a perfect example.
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