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 like Buffett
What we'll learn:
1) Who is Warren Buffett?
2) Why you should understand a company before investing in it
3) Stocks and their price tags
Investing isn't easy, and you're going to have to do your homework if you want to choose the right stocks. There's a guy named Warren Buffett, and he might be the most famous value investor ever. Here's what you should do if you want to follow Buffett's example.
Understand the core business
Buffett makes sure he has a sense of the company and how it makes its money. He knows the products and makes sure the company's goods are better than the ones made by the competition.
Does the company have the lowest prices like Wal-Mart (WMT), or does it have a killer brand like Pepsi (PEP)? Or did the company create its own niche, like Tiffany (TIF) did?
Buffett refuses to invest in a company he doesn't understand. In fact, he was ridiculed for "missing out" on the tech bubble of the late '90s because he didn't understand the core business of most tech companies.
In the end, Buffett had the last laugh as he largely avoided the dot-com crash that cost investors billions of dollars. Starting to see why he's such a big deal?
Check out the long-term economics
Companies are like flowers: They need favorable conditions to continue to grow and be profitable. For example, the discount biz — Wal-Mart, Costco (COST), and Target (TGT) — is pretty crowded and profit margins are very low.
Low margins mean profits won't grow that fast. However, this doesn't mean that they aren't profitable companies — it just makes it harder to grow faster.
On the other hand, there are industries that are growing at higher rates, like home health care.
Our parents and grandparents are getting old, and there are a lot of older people out there. So the demand for this service is going to be high. And health care doesn't come cheap.
These companies are not working off margins as slim as those in the discount-goods industry. So do as Buffett does: Follow the demand, and watch the margins, and you'll eventually find growth. Simple.
Know the CEO
Getting a read on the people running a company isn't easy, but it's worth it. You want to know if the CEO has the same interests as his or her shareholders — you want someone who's in it for the long haul, like yourself. Google the CEO. Find out what he or she has done in the past.
Some of the best CEOs make a company better just by showing up to work every day. Look at Steve Jobs and Apple (AAPL) or Michael Dell at Dell (DELL) — investors cheered when they came back to their companies.
Analyze the price tag
Warren Buffett's final step is the most crucial — crunch the numbers. Figure out if a stock is selling at a discount. Financial reports can tell you which stocks are on sale. And who doesn't like a good sale?
There's Buffett's strategy nailed down in four steps. Being like Buffett may be tedious, but there's a reason why everyone talks about him.
Three Facts to Wow Your Friends at a Party
1) Warren Buffett still lives in the same house in Omaha, Neb., that he bought back in the 1950s for $31,000.
2) Buffett has always been into numbers: He filed his first tax return when he was 13. He owed seven dollars.
3) Because tax laws are so funky, Buffett actually pays less tax than his employees (17% vs. 32%), even though he's one of the richest men in the world.
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