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
The role of risk
What we'll learn:
1) How playing the market is like throwing a party
2) Why being risky is better for some people, but not others
3) Is the risk worth it?
Life is full of risk/reward scenarios. Say you're hosting a party. You can order pizza, put on your favorite radio station, and play Monopoly. People might have fun, but you won't be accused of being the most creative party host of the year. (And if you're going this route — umm, you can skip inviting us to your next bash.)
Or you can go the other way: You can try to make elaborate hors d'oeuvres, create themed playlists for your iPod, and create a series of complex games. Risky? Sure.
The food could be a disaster, and the music and games could disappoint. But if you pull it off, you'd have some very impressed party guests.
The same goes with your money. You could be safe and place your money in a bank. It would be nice and cozy, and it would earn about four percent each year without fail. No more, no less. You'll sleep well at night. But you won't be a billionaire anytime soon.
If, however, you took a risk on a publicly traded company, you might earn more, say even 10 percent or more. Then again, you might lose money.
Behold the delicate balancing act of risk.
Every transaction in life comes with risk. Let's say you lend $100 to your best friend.
You know him well and your good judgment tells you to trust his promise that he'll repay you — with 10 percent interest — in one year.
The most you'll get back is $110. The worst-case scenario is you wind up getting zero dollars back (and perhaps you end up short one friend).
That's essentially how it works with stocks. The most you stand to lose (excluding brokerage commissions, of course) is what you gave to the company.
If you invest $100 in shares of a lemonade stand, the most you will lose is $100. But your gains, theoretically, are unlimited, unlike the fixed gain of $10 you'd earn from a bond (or from your friend's loan). If you choose your stocks wisely, there's no cap on how much money you can make.
One thing's for sure — it's a lot less likely you'll lose money buying bonds or depositing your money in a savings account as opposed to buying stock. But remember that in exchange for this risk, you might make a lot more money.
Choose well, young Jedi.
Three Facts to Wow Your Friends at a Party
1) U.S. Treasury bonds are considered to be one of lowest risk investments, as long as the government doesn’t go out of business.
2) “Penny Stocks” are often considered to be one of the riskiest investments.
3) Studies have shown that a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction.
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