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
Diversification
What we'll learn:
1) What shoe shopping can teach you about the market
2) Why you should diversify
Want to go shoe shopping? Well, we don't, but some people love it. And believe it or not, you can learn a lot from shoe shopping.
See, shoe shopping is like investing because there are many different options for shoe-buyers. There are different styles, colors, and shapes.
So what's the connection here? Well, would you ever buy 10 pairs of the same shoe? If they fall apart or go out of style, you'll be left with a bunch of useless shoes.
The point is, there are different kinds of shoes like there are different kinds of stocks. The same way you want to have a variety of shoes, you also want to own a variety of stocks — and that's called diversification.
So let's say you love Apple (AAPL) and the stylish iPod and iPhone. But if you invest all your money in Apple, you're taking a very big chance. Maybe nobody will be using their products in a year — you never know.
What you want to do is diversify.
Don't just think about iPods and iPhones, think about all the other products that are out there. If something bad happens in the consumer market — well, we all still need health care and the highways still need replacing.
Smart stock buyers look at industries and sectors, too, not just companies.
You can also diversify across different sizes of companies. Small companies can be all over the place but give you more growth, while large companies are typically more stable but not as exciting. Ideally, you have a mix of the two.
You can diversify in many different ways by simply picking stocks that will react differently in different times.
Just like you wouldn't want to have a closet filled with snow boots in August, you don't want to have stocks that will all sink if something happens to a specific industry.
Diversification may keep you looking good when it comes to shoes, but it can actually protect you from catastrophe when it comes to stocks. So it's always best to make sure.
Three Facts to Wow Your Friends at a Party
1) Stock personality Jim Cramer often touts diversification as "the only free lunch in finance."
2) On the other hand, stock guru Warren Buffett doesn't like to diversify. His advice is to "put all your eggs in one basket and watch that basket."
3) You can also diversify by country — some investors buy stocks from different countries in case one suffers a crisis.
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