How to Become a More Savvy Business Investor
You can become a more savvy business investor by understanding tools that lenders and investors use for getting information value from a business’s financial reports. An investment opportunity in a private business may not present itself often. However, if you make it known that you have money to invest as an equity shareholder, you’d be surprised at how many offers come your way.
Alternatively, you can invest in publicly traded securities, those stocks and bonds listed every day in The Wall Street Journal. As an example, your stockbroker would be delighted to execute a buy order for 100 shares of, say, Caterpillar for you.
Remember that your money does not go to the company (Caterpillar, in this example). Your money goes to the seller of the 100 shares and you are investing in the secondary capital market — the trading in stocks by buyers and sellers after the shares were originally issued some time ago. (If you invest in the primary capital market, then your money does go directly to the business.)
You may choose not to manage your securities investments yourself. Instead, you can put your money in one or more of the thousands of mutual funds available today, or in an exchange-traded fund. You’ll have to read books or other publications to gain an understanding of the choices you have for investing your money and managing your investments.
Investors in a private business have just one main source of financial information about the business they’ve put their hard-earned money in: its financial reports. Of course, investors should carefully read these reports, looking for the vital signs of progress and problems. The financial statement ratios point the way — like signposts on the financial information highway.
Investors in securities of public businesses have many sources of information at their disposal:
They can read the financial reports of the businesses they have invested in and those they are thinking of investing in.
Instead of thoroughly reading financial reports, they may rely on stockbrokers, the financial press, and other sources of information. Many individual investors turn to their stockbrokers for investment advice.
Brokerage firms put out all sorts of analyses and publications, and they participate in the placement of new stock and bond securities issued by public businesses. A broker will be glad to provide you information from companies’ latest financial reports.
The more you know about interpreting a financial report, the better prepared you are to evaluate the commentary and advice of stock analysts and other investment experts. If you can at least nod intelligently while your stockbroker talks about a business’s P/E and EPS ratios, you’ll look like a savvy investor — and you may get more favorable treatment. You might consider watching financial news on television or listening to one of today’s popular radio financial talk shows.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
