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
The government's role
What we'll learn:
1) Why there is no such thing as a "free market"
2) How tulips connect to the SEC
3) How the government watches your back
Much like a "free lunch," or "Hey, I've got some great Cubs tickets, but...", a "free market" may sound appealing, but it comes with some serious strings attached.
A free market (theoretically) has little government guidance or regulation. And without the Feds, buyers and sellers would work directly with one another to exchange payment for goods.
Sounds kind of simple — but it's not. Here's a real-life example: Let's cast our minds back to Holland in the early 17th century. (Surely we've all imagined ourselves back there.) Anyway, a flower known as the tulip became pretty popular, and its bulbs were in high demand.
What happened next? Chaos.
The guys selling the bulbs began to charge more and more, until they were selling for more than 10 times an average worker's annual income. For a flower bulb! No one had regulatory control, and sellers took advantage of a so-called "free market."
And then, just as quickly as it flowered (get it?), the market crashed. Call Holland's early tulip market the first so-called "bubble" to burst.
Let's look at another basic example of supply and demand — a lemonade stand. You own one. You have a certificate that says "[YOUR NAME HERE]'s Lemonade Stand." There's your proof.
But what if you were the swindling type and printed fake paper certificates to sell to people, guaranteeing them a share in your stand — and then you didn't deliver?
This so-called "free market" can't work, because dishonest people will continue to exploit buyers and sell fake products. A free market is wide open for unscrupulous people to enter.
So that's why the wise men and women on Capitol Hill stepped in to police all market activity. The U.S. government realized the importance of guaranteeing that owners actually received what they bought, and that this activity would fall under the government's control.
And that's why the Securities and Exchange Commission (also known as the SEC) was born. The SEC regulates all brokers, stock and securities exchanges, and any financial professionals an investor might deal with when he or she purchases or sells a stock.
Now, the markets are a highly regulated business, and everyone is thoroughly checked, because the government wants to make sure everyone's money is safe.
The government's rules and regulations ensure that while you might lose money in the stock market, you won't lose it to a swindler. Well, most of the time.
Three Facts to Wow Your Friends at a Party
1) The Securities Exchange Act of 1934 created the Securities and Exchange Commission.
2) The SEC is composed of five commissioners, and no more than three can be from a single political party.
3) Comment letters are letters by the SEC to a public company raising issues and requesting comments.
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