'RealMoney' Radio Recap: Back to Basics

"A recent study found that about half of a survey group of high school seniors were unable to answer basic questions about personal finance and economics," Jim Cramer told his "RealMoney" radio show listeners Thursday.

These students had no idea that stocks have been the best-performing asset class in the history of our nation and that you can incur taxes on interest earned in a savings account, Cramer said. "Do they even know what an asset class is?" he asked.

"Fed Chairman Ben Bernanke says that financially literate consumers make the financial marketplace work better, and they are better informed citizens as well," Cramer said. "I couldn't agree more."

For those who are mystified by the marketplace, Cramer said there are three things you must understand:

The first is that when people invest in companies, they do so to get a share of the profits. This money can come from capital gains as the stock appreciates, or from dividends, meaning the money the company kicks back to investors.

Only if you are in stocks do you get those streams, he said.

With bonds, you just give your money to a government or company and they pay you a couple of times a year until you get your money back. You're just being a bank, Cramer said. Buying a bond doesn't give you the right to participate.

The second concept that must be understood is that of debt.

A $3 stock isn't a good buy if the company's balance sheet is full of debt, Cramer said. For example, when Worldcom was at $1, it was trading 50 million to 60 million shares a day. He said that people didn't realize that the company had substantial debt and that once the company went down, their $1-a-share investment would be worth nothing.