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
Where to learn about a company
What we'll learn:
1) What is an annual report?
2) What do the financial statements tell you?
3) Is there actually good info in these reports?
If you want to find out about a company, you can. Believe us — there's no shortage of info out there. Some would say it's too much, but better to have too much than too little.
But where do you begin? The main documents we're going to talk about are the annual report, the three financial statements, and a little something called quarterly reports.
Annual report: What would your report card look like if you could write it yourself? That's pretty much what an annual report is. Every year, companies are required to write a lengthy report that's filled with nice pictures, glossy pages, and so on. This report tells investors what the company did with your money.
Believe it or not, that's part of the CEO's job. Remember, the CEO is your employee — he has to report to shareholders because they are all part owners of the business.
Then comes the buzzkill — the numbers. This is the real report card without the spin — numbers can't lie. The law forces companies to produce financial statements that explain the numbers in a way that conveys the economic reality of the business.
The numbers come in three different flavors:
Income Statement: Some people call this one the profit and loss statement. It shows all the money the company made and how much they spent to make that money.
What's left, which is at the bottom and also called "the bottom line," is net income. That's the money left over for investors — i.e., you.
Balance Sheet: This is a summary of everything a company owns and owes at any given time. Instead of focusing on money spent and made like the income statement does, the balance sheet is more like a snapshot of what the company is up to and its prospects.
Statement of Cash Flows: Cash in and cash out — that's what this statement shows. So if you spent $20 and someone gave you $30, it would go into your own personal statement of cash flows.
This is a good one to look at because a company that has lots of cash on hand is always better protected than a company with no money in the bank.
There's one more statement worth mentioning that's actually kind of fun to check out: the proxy statement. It isn't part of the annual report, but you can get it from a company's website or from the SEC. Here, you'll see how much all the head honchos get paid and who belongs to the board of directors.
These can be interesting to read, especially the ones put forward by shareholder groups, which are often followed by an explanation from the company as to why the shareholders' proposal is a bad idea and should be rejected.
We won't say these are the most riveting things to read, but all of this information can help you. The numbers don't lie, and the CEO is obligated to tell you about the company, so it's worth your while to check out these reports.
Three Facts to Wow Your Friends at a Party
1) Warren Buffet's annual shareholder letter in Berkshire Hathaway's (BRK.A) annual report is one of the most widely read documents in finance.
2) The annual report is published for shareholders. The SEC requires public companies to file a Form 10-K, which is a more detailed version of the annual report.
3) Remember we said these reports were filled with pretty pictures? Well-designed annual reports are recognized with a number of design awards.
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