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AAFM Basics on Investing, Financial Markets and Financial Planning
By George S. Mentz, JD, MBA
Guide to Financial Statements . 3
Financial Statement Ratios and Calculations . 8
Figuring Out Your Finances . 10
KNOW YOUR INCOME AND EXPENSES . 11
Small Savings Add Up to Big Money . 12
Pay Off Credit Card or Other High Interest Debt12
Mutual Funds Without Active Management17
Watch "Turnover" to Avoid Paying Excess Taxes . 17
Selecting a Financial Professional18
What If I Have a Problem? . 19
What Is a Variable Annuity? . 20
How Variable Annuities Work . 21
The Death Benefit and Other Features . 22
Tax-Free “1035” Exchanges . 25
Ask Questions Before You Invest27
The Basics of Treasury Securities . 28
What You Need to Know About Trading In Fast-Moving Markets . 32
Online trading is quick and easy, online investing takes time . 33
Set your price limits on fast-moving stocks: market orders vs. limit orders . 33
Online trading is not always instantaneous . 33
Know your options for placing a trade if you are unable to access your account online . 34
If you place an order, don't assume it didn't go through . 34
If you cancel an order, make sure the cancellation worked before placing another trade . 34
If you purchase a security in a cash account, you must pay for it before you can sell it34
If you trade on margin, your broker can sell your securities without giving you a margin call34
No regulations require a trade to be executed within a certain time . 35
What To Do If You Have a Complaint35
Stocks and Financial Research . 35
Getting Info About Companies . 36
Other Types of Information . 36
Advantages and Disadvantages . 39
How to Buy and Sell Shares . 42
How Funds Can Earn Money for You . 42
Looking Beyond a Fund's Name . 50
Bank Products versus Mutual Funds . 50
Glossary of Key Mutual Fund Terms . 51
Home Mortgages and Loans for your Home . 58
How the USA Economy Works . 66
The USA Stock Markets and Financial Markets . 75
If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult and they aren’t rocket science.
This brochure is designed to help you gain a basic understanding of how to read financial statements. Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this brochure will explain how to read the basic parts of a financial statement. It will not train you to be an accountant (just as a CPR course will not make you a cardiac doctor), but it should give you the confidence to be able to look at a set of financial statements and make sense of them.
Let’s begin by looking at what financial statements do.
We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!” Well, that’s what financial statements do. They show you the money. They show you where a company’s money came from, where it went, and where it is now.
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over time.
A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.
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