LEVEL 1 GLOSSARY
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Bonds
When you buy bonds, you're basically lending money to municipalities, states, and other government entities, which they use for construction projects and other fun stuff. They then pay you back with interest. These aren’t the biggest money makers, but bonds are fairly stable for those of you who think “risk” is a dirty word.
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NASDAQ
It's known as The National Association of Securities Dealers Automated Quotation System, but suffice to say this stock exchange is one of the biggies.
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Return
Gain (or loss) from an investment. Unless you're fiscally masochistic, you're going to cross your fingers for a gain.
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Revenue
The money generated from sales. If you own a lemonade stand and charge 25 cents per cup, add up all the sales for the day and—voila!—that's the revenue (just to keep you on your toes, sometimes people just refer to this as sales).
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Stock
This is your piece of the corporate pie, and it entitles the holder to a share of assets and earnings.
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Bull Market
Like a bull charging forward, a “bull market” is typically a market on the upswing. Olé!
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Debt
It's a bad word in personal finance, but it's pretty common in the corporate world. This is the money that a company owes to a lender.
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Dow Jones Industrial Average
The grandaddy of them all when it comes to indices only because it’s the oldest and most popular—not the largest or most representative. The Dow only represents the prices of 30 largest and most widely held companies in the U.S.
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IPO
Short for Initial Public Offering, this is a private company's way of saying, "Do you want a piece of this?" This is when a company offers shares to the public to get more dough to grow the business. Also known as "going public."
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NYSE
The New York Stock Exchange, a.k.a. Wall Street, is where stocks are bought and sold.
See full glossary
In Level 1 we'll introduce you to some of the basic concepts of investing. Each concept features a brief description and a case study, so you can see how each concept works in what financial analysts call "the real world." When you've mastered a concept, click the link at the bottom of the page to add it to your Report Card and move to the next one. Master all the concepts in each level, and then take the quiz to see just how smart you are.
- What is money?
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The uses of money
- Function of a bank
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What is a company?
- Is that company any good?
- How companies make money
- Brands
- Stocks vs. bonds
- What is a stock?
- Compounding interest
- What is the market?
- LEVEL 1 QUIZ
What is the market?
What we'll learn:
1) What is the stock market?
2) What does a Roman emperor have to do with the tech market?
3) What is a stock index, and what are the big ones?
So you keep hearing people talk about "the market." Did it go up? Did it go down? But first, let's ask: What is it in the first place?
Simply put, the market is a place to buy and sell stock, bonds, mutual funds, or a number of other financially based "securities." Without a market, there would be no way for the average Joe to buy or sell shares of stock, so what would be the point?
The stock market provides a place where stocks can be bought and sold, so money from investors can get to companies that need it to grow their business.
OK, now to look at why there's a stock market, let's take a trip to Rome, and whoa — you're the emperor! Very nice. You have a beautiful toga and a really great place to hang out and eat grapes.
So you step onto your porch one day to look out at the market, and you see these merchants buying and selling things.
Great, but you want to know how things are going. Are things getting better? Worse? Are there more buyers than sellers? What's the deal?
To find out, you'd hire someone to go around and ask each merchant, "How are you doing?" And after he'd asked enough merchants, you'd have a sense of where things stood.
The same thing applies to the stock market's major indices: the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite. In 1896, the editors of The Wall Street Journal took the 12 companies they felt best represented the United States economy and put them together in an index.
By 1928, the number of Dow stocks was at 30, and though the companies within the Dow have changed dramatically, the number has stayed at 30 ever since.
The editors essentially said, "We're going to do something very simple here — we're going to add up the price of each of their shares and we'll come up with a price for the index."
Their thinking was that, when the index goes up or down, those paying attention would get an idea of how the economy overall was doing — kind of like your helper asking the merchants at the Roman market how sales are going.
Years later, someone with more of a WeSeed way of thinking figured out that prices matter. But even more important than price is value.
In 1957, the folks at Standard and Poor's created something called the S&P 500 Index. They felt that 30 companies was too small of a sample, so they decided to take the 500 biggest companies in the United States, from a variety of industries.
They took the amount of shares from these companies and multiplied this number by their share price. In other words, stocks with higher market capitalization (share price times the number of available shares) are given a greater weight than "smaller" stocks.
By taking the value of each of those companies and adding it all up, they came up with something called the S&P 500 Index, and it tells you what the collective value of those 500 companies did on a given day.
Years later, people started to come up with different indices that represent different groups of companies — like the NASDAQ, which contains mostly technology and biotechnology names.
What do these three indices tell us? Well, instead of someone asking all of the merchants how their business is doing, all we have to do is check the S&P 500, the Dow, and the NASDAQ to get an idea of how "the market" — and therefore investors — are feeling.
That's much simpler now, isn't it?
Three Facts to Wow Your Friends at a Party
1) The “stock market” began on May 17, 1792, when 24 stockbrokers and merchants signed the Buttonwood Agreement. That formed what would become the NYSE.
2) Despite the New York Stock Exchange’s fame, it was not the first stock exchange in the United States. That distinction belongs to the Philadelphia Stock Exchange, which was founded in 1790.
3) The Dow Jones Industrial Average was created on May 26, 1896 — the same day Czar Nicholas II was crowned in Moscow.
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