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
Price of stock
What we'll learn:
1) Price and value are two different things
2) How a stock gets priced
3) What does the price tells us?
So you're looking at buying a stock. What's the first question that comes to mind? We're going to guess it's, "How much does it cost?"
And someone could give you the answer, but that answer has more to it than just a number. To a certain extent, the price of a stock also tells you the value of the stock.
Wait a minute, aren't price and worth the same thing? You would think so, wouldn't you? But you can't just look at two stocks and call one "cheaper" than the other one just because the price is lower.
Ahhh, if only it were that easy.
So to get to the bottom of this, let's figure out how a stock price comes about.
Let's assume you have a lemonade stand, and its value is $100. If there were 10 shares available and you owned one of them, your share would be worth $10.
Why? Well, $100 divided by 10 shares gives you $10. So each share is worth $10. Simple enough, right?
But what about value? What really matters isn't the price, but the value of the company — which is actually a number you back into. We already know our lemonade stand is worth $100, and if we decide to sell more shares, then the price will change.
Let's assume the company decides to issue 90 more shares, bringing the total to 100 instead of 10. The price of the stock would now drop to one dollar. Why? The value is the same, only now there are more pieces of the proverbial pie here.
So which company is more valuable? The company with 10 shares trading at $10? Or the company with 100 shares trading at one dollar?
They're exactly the same: It's the same lemonade stand with the same amount of value. Only the share price is different.
This is an important lesson that a lot of investors sometimes forget. Share price tells you what an individual share is worth, but it doesn't tell you much about the value of the company behind the stock.
So the next time you hear someone tell you a stock that costs $5 is "cheap," feel free to correct them and ask them if they know what the value of the company is.
You might feel like the smarty-pants guy in the room, but you'll be right.
Three Facts to Wow Your Friends at a Party
1) The pricing of stock shares originated in the 14th century.
2) In the U.S., a share must be priced at $1 or more to be covered by NASDAQ.
3) The highest share price on record is Berkshire Hathaway’s Class A stock (BRK.A), which closed at $150,000 on December 13, 2007.
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