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
On Sale
Everyone loves a sale, right? That's kind of what value investing is: Finding a really good product on sale.
But just like shopping at a sale, you have to watch out for what's a good buy at a low price and what's just plain cheap in price — and quality. Knowing the difference can be tricky. But as we pointed out in the lesson, there are some clues to help you along the way.
Let's go back to 2001, when the market was suffering from a major meltdown after the mania of the '90s dot-com rush. The same tech stocks that had rallied the market were now tumbling, and investors were scared.
That tumble saw computer maker Dell's (DELL) stock price fall from a high of around $50 in 2000 to a low of around $17 a year later. Not pretty.
But other than the market's nervousness about technology stocks, how was Dell the company doing?
Well, their sales, equity, and cash flow were all growing at a nice clip — people were still buying computers.
They just weren't buying computer stocks.
So if you owned Dell stock, you could have done what the masses did and bailed on it.
But if you practiced a little WeSeed way of thinking and you saw that people (and companies) were still buying new Dell machines, you could have come to the conclusion that Dell was a value stock.
Why had Dell tanked? The market was simply scared of tech stocks, and the fall had taken the company down with all of the others. But underneath, the company was in solid shape.
From that low of $17 in 2001, the stock rose to $40 in May 2005. The return on that investment? A sweet 24 percent compounded over just four years. Not bad at all.
Next time you see a stock plummet, dig in and see if you can find the reason. The market might be right about it, but it may also be wrong.
And that's when a value investor makes his move.
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