Glossary

• Incorporate: file a business with the state
   
• Balance sheet: a snapshot of the company; includes assets, liabilities, and net worth of a company
   
• Fixed asset: an investment in physical property used to generate income; it wears out over time; example: lemonade stand that costs $300 and loses $50 of value a year in wear and tear
   
• Inventory: raw, in-process, and finished goods that are part of a company’s assets used for sales; example: sugar, water, lemons, cups, napkins
   
• Income statement: shows how well the business has performed over time; includes a summary of revenues, expenses, net profits, and loss
   
• COGS: costs of goods sold
   
• EBIT: earnings before interest and taxes 
   
• Cash flow statement: all incoming cash from operations and external investments and all outgoing cash for business activities and investments
   
• Equity investor: shareholder
   
• Debt: money borrowed by one party from another; comes in many forms: mortgage, senior debt, junior debt, mezzanine debt, convertible debt; debt is structurally senior to equity
   
• Equity: stock representing an ownership interest; comes in many forms: preferred equity, common, options; only has a residual claim; riskier than debt, but greater profit opportunities
   
• Investment risk: the probability of the permanent loss of an investment
   
• Dividend: company profits paid out to stock holders
   
• IPO: initial public offering; the first time (initial) a company is going public (selling stock on public exchanges), offering all people the opportunity to participate
   
• Securities and Exchange Commission (SEC): government commission created to regulate the securities markets, protect investors, and monitor corporate takeovers
   
• Valuation: determination of a company’s worth
   
• Compound interest: interest is added to the principal, and then that total earns interest, and on and on . . . referred to as the most powerful force in the universe by Einstein
   
• Warren Buffet (b. 1930): American business magnate; considered one of the most successful investors in the world; his Two Rules of Investing 1. Never lose money 2. Never forget rule #1
   
• Public securities: companies that trade on the stock market
   
• A business that “lasts forever”: a business that is likely to stay around for a long time as it sells a unique product people need, has brand loyalty, high barriers to entry, and proves resistant to extrinsic factors; examples: Coca-Cola, McDonald's
   
• Barriers to entry: obstacles that make it hard to enter a market; example: brand loyalty, strong market presence
   
• Extrinsic factors: outside factors you can’t control; examples: interest rate changes, wars, tragedies, natural disasters
   
• Controlled company: a business in which one shareholder owns the majority of the stock
   
• Mutual fund: a manager pools together capital from a large group of investors and invest the money in a diversified collection of securities
   
• The Intelligent Investor: investment book by famous value investor Ben Graham, which turned Ackman on to investing