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
Shares outstanding
What we'll learn:
1) How a company is divvied up among its shareholders
2) Why shares are outstanding! (It's a joke, people — trust us, it'll make sense later.)
3) Why a company would alter how many shares they have
So let's say you're at the airport, and you're sitting next to a fancy guy in a fancy suit reading The Wall Street Journal. Before he sees you and gives you an angry look for reading over his shoulder, you see the phrase "number of shares outstanding."
And you're curious: What the heck does that mean? The fancy guy might deign to tell you that shares outstanding is just the total number of shares that a company has sold off to investors.
In other words, it's the number of slices this huge pizza of a company has been cut into for distribution among investors.
So if a company has 1,000 shares, it means one share entitles you to ownership of 1/1,000th of the company. The more shares you own, the bigger the piece of the company's action you get to claim.
Shareholders need to know about outstanding shares because the more pieces to the pizza, the smaller each piece is. So, let's say a company has 1,000 shares outstanding, and then issues another 1,000 shares to raise more money.
That means each share has just lost half its value, because profits will now be split among the 2,000 shares. It's kind of a bummer for investors, but all they can do is cross their fingers and hope the company makes even more money to make up the difference.
So what kinds of things can affect the amount of shares that are out there? Well, a company can always issue more shares.
They can also split their stock (which we'll get into later). This basically doubles the amount of pieces of pizza that make up the company by making everyone's pieces smaller.
A company can also buy some of those pieces back, which is called repurchasing shares, or a "buyback." That actually reduces the amount of shares, which can be a good thing for shareholders. Bigger pizza slices for everyone!
These are more advanced topics, and we'll go into them more in later modules. For now, all you need to know is that shares outstanding isn't a fixed number — it can go up and down depending on what's happening with the company.
There, now you know all the basic stuff you need to know about shares. We told you they were outstanding! And we don't know about you, but we could go for some pizza.
Three Facts to Wow Your Friends at a Party
1) It's usually a good sign when companies begin buying back their outstanding shares.
2) Some mutual funds will only allow the fund to buy outstanding shares once they are less of a "bargain."
3) Warren Buffet has given his CEOs only two rules: Do not lose any of your shareholders' money, and do not forget rule number one.
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