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
To HP or Not to HP?
Let's say you want to buy a stock on WeSeed. Everyone uses computers, and you know that's not going to change anytime soon. So you've narrowed it down to two companies: Everyone on WeSeed says Dell (DELL) and Hewlett-Packard (HPQ) are the top dogs.
Is there a way you can quickly compare these two companies? Well, P/E ratio is one way to do it.
As of today, Hewlett-Packard has a P/E of 11 and Dell's stands at 8.
Awesome. Great information, right? Definitely. But then you stop, stare at these numbers for a few minutes, and you realize: You have no idea what these figures tell you.
Here's a tip: Right off the bat, it tells us the market is willing to pay more for HP than Dell right now. It could be because it feels HP has some sort of advantage, or is better prepared for the future.
But if you did your research and discovered the two companies were basically equal in customer satisfaction, product quality, and everything else, then the P/E ratio would tell you something else.
It would tell you that Dell is a steal right now because it's way cheaper than HP. Remember that P/E stands for price-to-earnings ratio and is a measure of how much investors are willing to pony up for exposure to a dollar's worth of a company's annual earnings.
If all other things are equal, you might as well opt for the cheaper option, right?
Of course, but you'll probably never find a situation where one company is exactly like the other except their P/E ratios. But for our example, it's a good way to show off what the P/E ratio can tell us.
To top it all off, the personal-computer industry has a P/E ratio of 22 right now, so both of these companies look relatively cheap — all other things being equal — within their own industry.
Which is a good thing.
P/E can tell us some things about a company: How it compares to other similar companies and how it compares to its industry. But it can't tell you the whole story. For that, you'll have to dig into WeSeed and solve the puzzle on your own.
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