LEVEL 3 GLOSSARY
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Dividend
Not all companies pay dividends, but when they do, you should say "Cha-ching!" Dividends are payments the company makes to their shareholders. They're a way of giving the shareholder a piece of the profit pie.
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Dividend Yield
Put your dividend dinero into a percentage: a $1 annual dividend for a $10 stock has a 10% yield.
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Earnings Per Share
This is the amount of money earned per every one share. If the company made $1 million in profits and has 1 million shares outstanding, the EPS would be $1.
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Liability
Think of this as debt, but then cast the net a little wider. Liability is the obligation to repay its loans, IOUs, payroll, leases, pensions, vacation hours, and taxes a company owes.
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P/E Ratio
Stocks work hard for the money, so hard for it honey—ahem. P/E ratio is "price-to-earnings": it tells you how much you’re paying for the earnings that a share is generating. For those of you who are visual learners, P/E Ratio = price per share / earnings.
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Retained Earnings
If you're expecting a dividend check and end up empty-handed, it could be because the company decided to keep the earnings and put them back into the business. This money, and all other earnings the company keeps, are called retained earnings. The amount of a company's retained earnings can be found in the shareholders' equity section of the balance sheet.
See full glossary
In Level 3, we'll introduce you to the advanced concepts of investing. Just like the first two levels, there will be some concepts and one quiz. Ace the Level 3 quiz and people will be very impressed when they see your Report Card. So dig in, have fun, and ace that quiz! Good luck!
- The role of risk
- Diversification
- Corporate actions
- Dividends
- Reinvesting
- Issuing more shares
- P/E ratio
- LEVEL 3 QUIZ
Corporate actions
What we'll learn:
1) How companies are — or aren't — like the rich and famous
2) What will the market say about a company's moves?
3) Mergers and takeovers
Companies and their stocks are kind of like famous people: Every move they make is splashed on the front page of the papers the next day. Of course, Brad Pitt and Angelina Jolie are on the cover of Entertainment Weekly, while companies' big moves are mostly reserved for The Wall Street Journal. But that's beside the point.
In the world of stocks, the market instantly judges whether a company's latest steps are good or bad. These announcements are called corporate actions, and they include things like cutting a dividend or acquiring another company.
There are myriad other corporate actions, and their names are kind of...well, not super-exciting: IPOs, mergers, dividends, stock splits, and stock buybacks.
But corporate actions are hugely important because they have a direct impact on a company's share price.
Here's the tough part, though: It's hard to predict whether the market will smile or frown upon certain actions. An accounting scandal is pretty clear cut, but most of the time it's not that easy.
Back in the early 1990s, IBM (IBM) lost some business because part of its core business (servers) was being subsumed by personal computers. The share price had been dropping for months, and the company announced it was cutting its dividend from $1.21 per share to just a quarter.
Not good, right? But when the market opened that next day, the stock price actually went higher. There were two reasons for this — the market was relieved that IBM would still pay something, and the uncertainty that had hung over the stock was finally over.
See? It can be tricky.
IPO
This is the big one: When a private company decides to step into the stock-market spotlight and go public. This means they have to play by the SEC's rules and answer to these new people coming aboard called shareholders.
Mergers and Acquisitions
Sometimes companies merge and acquire each other to try to buy themselves some growth.
Sometimes the market thinks it's a great idea, but sometimes the market says it's a bad move. When Google (GOOG) acquired DoubleClick, it was a great move. But when Time Warner (TWX) acquired AOL, it was a disaster.
Stock Buybacks
This is when a company decides to buy back some of its own shares. It's often when companies want to say to the market: "We're so confident in our own stock, we're buying more!"
Sometimes, that works. But sometimes, the market interprets it as "We're desperate — we need to do something, anything!"
Stock Splits
This one is pretty simple, but it can confuse people. Basically, this means that a company takes its shares and halves them, creating twice as many shares that are worth half as much as the old ones.
Why would they do this? Well, it's one way to lower the price of the share to make it seem like it's "cheaper." Companies like The Washington Post (WPO), with a stock price over $400, refuse to give in to this artificial-pricing trick. But it means investors have to pay $400 for one share!
There are other kinds of corporate actions out there, but you're starting to get the picture — it's tough to figure out how the market is going to judge these moves. Sometimes it looks like terrible news, and the stock winds up skyrocketing.
Other times things look rosy but the market disagrees, driving the price down. But the more you watch out for these actions, the better you'll get at developing your radar for this stuff.
Corporate actions can have a huge impact on stock prices — that's pretty obvious. Just make sure to pay close attention when they happen so you can start spotting the good from the bad. And the ugly.
Three Facts to Wow Your Friends at a Party
1) Spinoffs are when a company takes a part of the company that's doing badly and tries to basically get rid of it. Motorola is trying to do that with their cell phone business.
2) In the hard-to-believe category, Visa (V) just went public on March 18, 2008.
3) One of the largest mergers ever was the 2003 union between Time Warner (TWX) and American Online, which created a company worth an estimated $350 billion at the time. Alas, it hasn't been a huge success in the long run.
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