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
Risk vs. Reward
Ok, so you're young, you have a real job, and you're ready to take on the world. So you get your paycheck, you pay your bills, and you've got a little left over. Then what? That's the big question.
Here's what we're thinking: Maybe you should take a look at your future. You need to put some money aside for those post-retirement days. (We know, retirement is a long, long ways away, but humor us.)
We're thinking you should look into investing. The stock market is a big, scary thing, but you're young and you've got time to live with some risk.
So let's get theoretical here for a second: Let's say, at the age of 25, you took $100 and invested it in the stock market. Not $100 every month, just $100.
Then you forgot about it. Assuming the market returns its typical eight percent annually, by the time you're 65 that $100 would have grown to be $2,011. Now imagine what would happen if you saved more than $100 — or better yet, saved $100 every year.
But ok, we admit it: We took a little bit of a leap there. We assumed the market would return an average of eight percent, and that's not always true.
The market doesn't always go up. Some years it goes down and sometimes it goes WAY down: The market plummeted -37 percent in 2008. Ouch.
Now if you're 25 and that happens, it stings a little. But the reality is that you likely have many working years ahead of you before you need that money, so you're probably all right.
But if you're 65 and you need your money sooner, that's a little different. That's why the 25 year old and the 65 year old have different risk profiles. So as you get older, you need to change your investments and move away from stocks and into "safer" investments like bonds.
So when you're 25, you might have 70 percent of your money in stocks and 30 percent in bonds. But the closer you get to the retirement party, the more you'll want to adjust based on how much risk you're willing to tolerate. In that case, maybe more bonds and less stocks is the way to go.
It's just something else to think about as you think about your money. It is, after all, your future.
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