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
A Shoo-In
Our lesson talked about shoe shopping, so let's do that. (Apply the lesson to a real-world shoe example, that is — not actually go shopping for shoes.)
For a second, pretend you can only buy two pairs of shoes, and they have to last you the whole year. Your friend Barry decides to buy two pairs of Crocs (CROX) sandals because he just wants to be comfortable and he doesn't really care about following trends.
Then you have Lisa, who decides to buy two pairs of boots from Deckers (DECK) because she loves being outside and traipsing in the mud. She's always been a very outdoorsy type.
But what's going to happen when winter hits and Barry wants to go outside and see a movie? He's going to freeze his feet off wearing those silly Crocs. People will probably make fun of him too, and that's kind of a drag.
As for Lisa, she'll be stuck wearing big, heavy boots in the summer. Those same people making fun of Barry?
You guessed it: They're going to let Lisa have it, too. (People can be so cruel, can't they?)
So instead of buying two pairs of the same shoe, the smart shopper would buy one pair of Crocs for the summer and a pair of boots from Deckers for the winter.
That's diversification, and it works the same way with stocks. When bad times hit one kind of company — let's say a computer company — it would be great to also own a company that isn't affected by the same kind of news.
Like a construction company, for instance.
So even if people aren't buying computers and a stock like Dell (DELL) goes down, a home-repair stock like Home Depot (HD) would likeley be unaffected.
The bottom line: It makes sense not to have the same kind of shoe for all different kinds of weather, and it's the same with investing.
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