“The beginning of the end of the end of the beginning has just begun.”
—— The Grand Budapest Hotel.
The course had just finished all of its new materials. But I have only started learning about finance, about investment, about analyzing information, about decision making. I have learned about the institutions and methods there are in the financial market; learning about how to make them manage my wealth is yet to come.
What is finance? It is a form of trade where you buy money with money. Difference is the “money” you buy comes in the future, with an indefinite value; the “money” you use as the medium of purchase comes from your pocket, with a definite value. It isn’t the same as a complicated version of lottery where you throw in money and hope for the best.
What are we betting on? Are we betting on “trust?” No. We are betting on ourselves. We are betting on the knowledge and information we have and our ability to analyze the information we have. We are betting on the knowledge and information other investors posses and their ability to interpret theirs. We are betting on the numbers and facts ; we are betting on stability and volatility. It is a field of statistical science and rigorous calculations. It is not a place where you can dream of fortune without labor.
What is the Federal Reserve? It is an institution that keeps the stability and growth of the economy. It is not an autocratic government branch that limits people’s trading freedom. All of its “interference” abide by the rules of market supply and demand. “The interest rate” is not “set” just by the Federal Reserve, but actual money infiltrating the economy by borrowing, lending, and trading.
What is a bond? It is an “I owe you.” I borrow from you 10 dollars and I will pay you back in ten years. However, in these ten years, I will have to pay you 25 cents every year as interest, called a coupon. The federal government can issue it. Private corporations can issue it. Bonds are also graded and any bond with a grading below B+ is called a “junk bond,” where people have struck gold and lost terribly at the same time. Investing in bonds is not risk-free. It is considered, though, a safer way to invest your money in the long run, with low risk and, in turn, comparatively low returns.
What is a stock? It is a share of a company that you invest in. You own a part of the company once you have a share of its stocks. You, then, take responsibility of the prosperity of the company. Growth or wane, you are accounted for. Some companies pay dividends to their share holders; some don’t and use the dividends to reinvest in itself for growth. These company’s stocks are usually called growth stocks. The value of the growth stocks are largely proportional to the company’s performance. People make predictions about the future performance of the company, which is reflected by the stock price. Buying low, selling high, that’s how you make profit. Stock is not gambling, but analysis. Inside information can always help, but they reside on the legal boundary.
Let me end this semester work with a quote from professor Bruce Watson, my Principles of Finance lecturer:
“Don’t try to convince yourself that you know what you don’t.”
It is only the beginning of an education for life.
(The link below is a great documentary about financing, risk, and the vast effect this Big Boy’s world has on everyone: