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
Observe and (Annual) Report
We have a conflict here: 2008 was a pretty bad year for Bank of America (BAC). But the company is, by law, required to put out an annual report. This is a book filled with shiny, happy people extolling the company's greatness.
See the problem?
Ken Lewis, the Chairman and CEO of the company, wrote a letter to the shareholders that included statements like this: "I am very aware of the financial burden our decisions have created for our shareholders, but we felt it necessary to maintain our capital strength and stability in these uncertain times."
Wait a second: "Uncertain times"? My friend, you lost gazillions of dollars. There is no uncertainty here.
Then there's this: "Despite a year with no shortage of bad news, I maintain a positive and optimistic outlook for our future. Here's why: For the full year, in the midst of the worst recession in generations, we earned more than $4 billion, ranking us second among all U.S. financial institutions.
"Two of our three major lines of business made money (Global Consumer & Small Business Banking and Global Wealth & Investment Management)."
"And Global Corporate & Investment Banking, which has weathered so much of the capital markets disruption this past year, came very close to breaking even."
Whoa — hold on. "I maintain a positive and optimistic outlook"? "Came very close to breaking even"? Talk about rose-colored glasses.
OK, so Ken's note made us feel all warm and fuzzy, but let's take a look at the reality of the numbers also contained in the annual report.
Ken's letter told us that BAC posted their first quarterly loss. Not great, right? Well, that loss was $0.44 a share, for a total of $1.8 billion.
That drop in profitability he vaguely refers to? That meant the company earned $0.68 a share last year — compared with $3.36 a share in 2007.
And the share price dropped, too: from $37 at the start of 2008 down to $14 at the end of the year.
There's more, but the bottom line is this: You can get a lot of good information from an annual report. But you also need to know what's going on behind the scenes, which is exactly the kind of thing you'll find at WeSeed.
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