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
Working at the stock market
What we'll learn:
1) The inner workings of the stock market
2) What "providing a market" means
3) The role brokers play in the whole thing
"The market" is a big, scary term, we know. But at its core, it's made up of people: bosses and subordinates, newbies and pros. We may envision a guy in a power suit making trades over the phone, but is that really who works at the market? Let's take a closer look.
Let's say you start a lemonade stand, and it goes public (nicely done!). You decide to list yourself on the New York Stock Exchange, which means your ownership interests are going to be passed onto the trading floor, into the hands of what's called the specialist.
His job is to say that today's value of your lemonade stand is, for example, $10. And the specialist sets out to buy an ownership interest in our stand for $9.90 and sell one for $10.10.
What he's doing is guaranteeing that a market, with willing buyers and willing sellers, will be provided.
Now anyone can buy and sell shares, thanks to the specialist who's providing the market. He does it for that small difference in price (in the above example, it's 20 cents per trade), called the spread.
By buying for a lower price and selling for a higher one, he hopes to make some money. Even pennies per trade add up when hundreds or thousands or millions of trades are happening each day.
But if you're Joe in Topeka, you wouldn't want to fly to New York to deal face-to-face with this specialist, would you? And he's going to be hard to reach on the phone. That's where a brokerage comes in.
See, the specialist is busy on the floor, so he can't take the time to make sure that Joe in Topeka has enough money to buy the shares he wants to buy.
So how does the specialist make sure the money changes hands from Topeka Joe to the person selling the lemonade stand shares?
That's where the brokerage comes in. Joe's brokerage acts as the middleman — a government-registered middleman.
All brokerages are required to register with the government to effectively say, "Don't worry, I am going to prequalify the buyers. I am going to make sure they have money in their accounts, and that they know what they are doing."
So now the broker will act as Joe's agent, in much the same way a real-estate agent helps you buy a house. They don't actually buy the house for you — they just show you the property and initiate transactions with the seller.
So Joe in Topeka can go in through his brokerage account and look for something he thinks he wants to buy at a price he likes, just like buying a house. And he sees the price for a share of our lemonade stand is $10. Joe decides he wants to buy it and become a partial owner in our company.
Joe pays his brokerage the $10 plus a small fee for helping him out (otherwise known as a commission — real-estate agents have these, too).
The specialist, who has already bought ownership stakes from us, gets the $10 even though the stock was worth only $9.90 to him. And Joe gets his share in the lemonade stand.
Everyone's a winner — theoretically, anyway.
Three Facts to Wow Your Friends at a Party
1) Originally, stocks were traded in what's known as a "call market." The market president would read out each stock and the brokers would trade the shares. There was a morning session and an afternoon session.
2) On December 1st, 2005, the highest price was paid for membership in the NYSE at $4 million. Thirty days later, the NYSE moved away from seats to annual trading licenses.
3) The longest period in which the exchange was closed occurred during World War I, when the NYSE was closed for four and a half months starting July 31, 1914.
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