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
Invest in what you know
What we'll learn:
1) How to succeed in the market by following your passions
2) How you're smarter than the guy in the power suit
3) Who the heck is Peter Lynch, and why should you care?
So you're all excited about jumping into the world of stocks. But then you hesitate for a second, think about it, and you get nervous. "Hold on a second," you say. "I can't do this! I need to know more about numbers, economics, P/E ratios, and..."
Stop right there.
Instead of picking up The Wall Street Journal and trying to become a financial pro, we think you're better served by just starting with what you know.
You might say, "But I don't know anything!" Wrong — you already know a lot. The things you buy, the hobbies you're into, the stuff you do every day — all of these things have companies behind them.
Let's use an example here — pretend you're a runner. You run any chance you get: to work, on your lunch break, on the weekends, and even when it rains. You're obsessed with running.
Your knowledge of running means you have some stock knowledge, too. Why? Well, Nike is a public company and you probably know a thing or two about them — and not just from an outsider's point of view.
So instead of trying to learn about oil stocks or biotechnology stocks just because someone on TV is talking about them, why not start with something you know about and are passionate about?
So ask around. What companies do your runner friends like? What news is Nike making? What are they saying about their new products? More importantly, what are your friends saying about Nike's new products?
If your shoes are falling apart, or other people's shoes are falling apart, you'll see it. And you'll know about it because you care and because you're passionate about it. And so you have an advantage over the broker who's just sitting in his office, admiring his expensive diploma, and waiting for the numbers to come in.
See, there's a lag time between when the news happens on the street and when it gets to the guy sitting in the big office, staring at a chart. But this is something you're passionate about — you do it every day.
You're close to it. You have an advantage. So you know what's going on in your world, and you can turn that into stock-market success.
That's the idea behind investing in what you know. And don't just take our word for it: Look at what legendary investor Peter Lynch pulled off by following this advice.
When the silver-haired Lynch took over Fidelity Investment's Magellan Fund in 1977, it was worth about $20 million. Thirteen years later, it was worth about $14 billion. That's a pretty incredible run, no matter who you are.
Lynch did it by looking around and discovering stocks like Hanes. He found that company because his wife used Hanes' new L'Eggs pantyhose line and she raved about it. It doesn't take a Wall Street analyst to listen to your family, does it?
If you have a friend in the business, he's likely going to say, "Hold on one second — you need to know about book value, and market cap, and this or that." What he won't tell you is that more than 80 percent of the professionals underperform the market.
That's right, a monkey throwing darts at the stock section beats the pros half the time.
We aren't saying that you can beat the market. But odds are, you won't do any worse than the person who is managing your money. And at WeSeed, it's all FAKE money so you can test yourself and your instincts without taking a risk.
Three Facts to Wow Your Friends at a Party
1) Peter Lynch, who coined the idea of "investing in what you know," was hired as an intern by Fidelity Investments in 1966 partly because he had been a caddy for Fidelity's president at Brae Burn Country Club in Newton, Massachusetts.
2) Lynch is considered one of the greatest fund managers of all time, driving Fidelity Investment's Magellan Fund to a 29.2 percent average annual return over 13 years. His returns almost doubled the S&P 500's 15.8 percent annual return over that time.
3) Investing in what you know is usually a good thing, but not always. If you put your money into a company because an insider gave you a tip, and that knowledge isn't public, that's called "insider trading." Trust us, it's not something you want on your resume.
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