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
Issuing more shares
What we'll learn:
1) Why do companies issue additional shares?
2) What is a secondary offering?
3) When enough is enough
We keep talking about your fictitious lemonade stand. Well, sorry, we're going to do it again, but we have good news: You're doing so well that you now have locations in Atlanta, San Francisco, and Boston.
And you think, "You know, business is really good, we're doing great — maybe we should get bigger and make more money."
But sometimes you have to spend money to make money. And how do you make more money? Assuming your business is a publicly traded company, you can issue additional shares.
This is referred to as a "secondary offering," as it comes after a company's initial public offering (aka, an IPO).
So let's say you're walking home one night after a hard day at the lemonade stand, and a mysterious stranger comes up to you on the street and says, "I have something you might be interested in: I have a lemon grove that you can buy."
Hmmm, you think. "It would save you a lot of money on lemons down the road, and you'd increase your profits dramatically," he says. "Think about it." He hands you his business card and walks off into the cold night.
Oh, how you want to buy the lemon grove. You'll save money in the long run and you'll make better lemonade from the lemons you grow yourself. But...
The lemon grove will cost $150, and if you scrape together all of your money, you have $160. You can afford it, but that lemon grove will take up pretty much all your resources. But when you crunch the numbers, you might make an additional $100 a year by buying the lemon grove.
So what should you do? Here's one solution: Issue additional shares — say, 100 shares. You're publicly traded, so investors would snap up the shares on the stock market for $1 a share.
You've just made $100 — enough to comfortably buy the lemon grove.
You are doing exactly what we said a great company does: You're reinvesting in yourself by taking the money that you've made and putting it back in the business to make the business better.
In the long run, you're going to make better lemonade for less money. This is one reason why companies issue more shares.
Of course, there is a limit: Going back to our earlier pizza analogy, you can only cut a pizza into so many tiny slivers before people get really hungry. Having too many can create too many variables, and that affects the value of the stock.
So companies must weigh the effects wisely when deciding to issue additional shares. Ditto investors — if your slice of pizza looks super scrawny, it may not be the right meal choice for you.
Three Facts to Wow Your Friends at a Party
1) A company is required to file a Listing of Additional Shares ("LAS") Notification at least 15 days prior to issuing any common stock.
2) In the final six months of 2007, Citigroup (C), Morgan Stanley (MS), and Bear Stearns raised more than $83 billion in equity by selling shares in their own companies.
3) Bank of New York was the first corporate stock traded on the NYSE.
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