Alan Kring Productions and Associations with Emergent Light Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 190 for Spring Semester 2024.
Hey, look at the numbers.
First things first, I use the terminology day over day, and this is early in the market's morning.
Remember, the market is an hour different from us.
So tell me right now, sir, is this a bull day or a bear day shaping up?
I don't know.
Okay, let's see. Let's get that a little bit brighter.
Turn down the lights. I apologize for that.
There we go. And get that idiotic ad off the screen.
If you ask Google, I don't want to see your ad.
Okay, now, you, madam, is this a bull day or a bear day?
Bull day.
You say bull. It's a bull day.
You got to be positive about it.
It's not necessarily a rift snorting bull day, but it is starting off on the right foot.
And as you can see, it has been rising through the early morning.
Started out and then it rose.
Now, a couple of things here.
Notice, first of all, we always look at percentages, never at the numbers themselves.
So the Dow 30 is up a quarter of a percent.
Then we see that the S&P 500 is up 0.65 percent and the NASDAQ is up 1.10 percent.
That's a normal pattern because you're moving to higher risk portfolios.
As you go through the Dow, these are the lumbering giants of the earth.
Very low risk portfolio.
They're not going to die. They're oligopolies, all of them.
So they tend to have lower risk and that is always, always associated with lower expected return.
That is one of our axioms in finance.
I will refine that twice from where it is right now with you.
But right now, the lower the risk, the lower the return.
That is normal. That is the way it works.
If you want to take higher risk, the only reason you would do that is because you expect a higher return on it.
You, sir, we're going to go up to the top floor, up above the fourth floor, and I am going to give you $20, $10, to jump off the roof of this building.
$10. You want to do it? Hell no. Why not? Why does that offer you $10,000?
I think that could cover my debt.
Yeah, just wait until a couple of squirrels walk by so they can have a thought.
You're going to take a higher risk so you expected a higher return for taking that risk.
That's how life is. You don't take stupid risk and markets know that.
They know that for a fact. And that drives market performance, market behavior.
It drives our economic behavior as well, that risk-return relationship.
So this low-risk Dow 30 portfolio, 30 of the giants of the earth, it's not going to have as much push on it as the S&P 500.
The S&P 500 is the 500 largest companies, pretty much, in the world.
These are generally, if you remember from your economics learning, if they did it right, these are monopolistic competitors.
They are monopolistic in their products in the short run, competitive in those products in the long run.
They are the scrappers, the fighters. Most of you will work for a Fortune 500, an S&P 500 company,
or your company will be dependent upon resources as far as purchases or sales from 500 to 500.
They're higher risk. They have to fight for their dinner.
Unlike the giants that just sit there, they can't be brought down.
S&P 500s have to fight for every dollar that they have for dinner.
So you'll see them have a, normally, typically on an unusual day, they'll either be up more or down more than the Dow.
And then the NAS get back. It's just thousands and thousands of small, high competition, fierce competitors.
There are a few giants in the NASDAQ that never moved to the NYSC, but they are generally going to be higher risk companies.
They have lower prices, so they have more room to jump up.
But that is why you will see this tend to have a higher up or a greater down than the S&P 500.
And again, it's percentages that matter. You can't compare these numbers. These are different indexes.
So you have to look at the percentages.
And the Russell, God knows what that thing is measuring.
But crude oil. Now you notice that the crude, well, before I go on here,
notice that if you look at those spark charts, the market started the day up.
It was a pop. See how in every one of those sparks, it began above the baseline.
That would have been pre-market, after market and pre-market pressure was on the buy side.
And it just exploded when the bell ding, ding, ding.
OK, so now you've got that part of it.
Then you go on and you see that right away, the bull said, no.
I mean, look at what they did. They dropped the Dow almost back to the baseline for the opening.
But it started to recover. And the NASDAQ, same thing.
You see, the markets tend to move together, except in a more magnified fashion,
the greater the risk of the portfolio you're looking at.
It doesn't always happen that way. Don't get me wrong.
We'll see days where things are just all kind of come bobbled.
But anyway, going over here to crude. Crude is volatile AF right now.
And it is up, down, around. And you do the hokey pokey and you turn yourself around.
And then it's up in the sky. There is volatility. That's something that's important to us.
You'll hear the word vol in our business.
And I'm talking our business now because I'm with finance majors.
The word vol can actually mean one of two things, volume or volatility.
Now, volatility is nasty. Normally, finance people don't like volatility.
It's not our friend. And volatile markets tend to be lower.
That pushes down prices. The volatility does.
But one way or the other, volatility in general, in finance, is an undesirable thing.
There is one market, and I'll talk some about it today, where I go into that class
and I say volatility is God to us. But in general, it is Satan to us.
Crude markets right now are highly volatile because God knows what's going to happen next in the world.
Up, down, oh God, the supply of crude is going to be cut because of this war or that conflict.
Or the price of oil is going to fall because there's so much oil on the high seas and the dirty tankers.
And the ports are open that can take them. Good news. So it's up and down.
Rumors are much more impactful in markets like this.
In normal markets, stock markets, rumors will move stocks a little bit. Boom, boom.
But in these kinds of markets, everything is leverage.
And that's a big problem. That leverage makes a tiny movement.
A rumor on this end has a great movement on the other end of the fulcrum.
Moving around here a little bit through the grinder.
Now, I do want to point out something. The $2,000 per ounce for gold is kind of like, I don't know,
it's sort of like some golden level. Above it and below it are kind of interpreted differently.
Right now, for a while, for the past few weeks or so, I guess,
the gold has been on the top side of that $2,000 an ounce.
Like neckline, as we call it.
It's kind of, you can see that it rolled up there overnight.
By the way, these commodity markets, they're on all the time.
There's no bell. Well, there is in the futures version.
Our trading day is eight hours, six hours, something like that, six and a half hours.
In the commodities markets, it's literally the world is alive.
There are commodities moving back and forth, trades happening day and night,
across the planet. So those markets don't sleep.
So you see that there's, look over here.
See how the spark charts for the day's trading are short for the stocks?
You see that? They just started a while ago.
Okay, over here, see the crude oil? See the gold? See the silver?
Those are just, they've been rolling. They're always there. They're always on.
So actually, and at this point in the course, I'm just giving you some fill in,
some knowledge, some of that background that we in finance kind of take to be our,
our bailiwick, our wheelhouse. All of what I'm saying here is,
whether or not you go into anything like this, you go into investments or commodities or whatever,
or you go into banking or real estate, this kind of basic knowledge is how we talk.
Now you see the 10-year bond? Oh, that took a butt bath at the opening this morning.
Did you see that? Boom. It was way down. It's been groveling back up.
Now these are yields. They're not prices. The price is the other way.
So this is saying that on the opening bell, the benchmark 10-year treasury bond,
and that's the one we use as our benchmark.
There are lots and lots of different bonds, obviously, classes of bonds and all that.
But it started out with a big price spike, which meant a big yield dip.
And then as the day has gone along, the yield has been crawling back up,
which means that the price has been falling, the mirror image of it,
as less and less demand for bonds has begun to seep in.
That early punch of demand pushing the price up has kind of vanished,
and so the price is tailing back down. It's almost flat.
Right now, we see that the yield on the 10-year benchmark treasury is down 1.8 basis points.
Now a hundredth of a percent is called a basis point.
So I see that this is down almost, in my jargon I say, down almost two basis points so far.
But it was down a lot more basis points earlier in the day, but it's been crawling back up.
And I'll deal with currencies another day when I'm drunk, maybe, or had a lot of coffee.
Now, go over here. Tokyo.
Last night, when we were all asleep, Tokyo was in full gear, cranking along.
I noticed Tokyo didn't have a very good day. It never did break even from the opening price.
From the opening, it dropped right away.
The bulls came back and tried a little bit of festivities, but the bears took over,
and then everyone was quiet, fighting back and forth for stability.
And then there was something that scared the markets a little more,
and the price overall of those 225 major stocks on the Tokyo exchange, overall their composite dropped.
And then after that, it just kind of gently crawled a little bit back up through the day.
But overall, it finished the day down 0.8%.
London, on the other hand, it's kind of interesting that I see the same pattern.
They're still trading right now. It's near the end of their day, but it's not nearing the end of their day.
But you notice how it started out up like ours did, and then it had that bear hit,
just like ours have been showing, and then it found a little bit of steam,
some rumors or some information came in, and then it kind of drifted along,
and then there was a little more excitement somewhere along there, and it had another push upward.
Now, again, well, not necessarily again, markets work on information.
Physicality in, well, there is no real physicality in stock markets, bond markets.
It's all an information game, and it works by one of the most fundamental physics principles, one of Newton's laws.
An object in rectilinear motion will tend to stay in rectilinear motion unless acted upon by a force.
In other words, something in space, if something is going in a straight line,
the only reason it will stop going in a straight line is if something pushes it, accelerates it,
pushes it down, pushes it up, or pushes it forward faster.
That's what happens in stock and bond markets, too, except information is the force.
If there's no new information coming in, a stock or a bond will just stay drifting.
It's only on some rumor, some information, some data point, new one, nothing old matters.
It's got to be something new, and that will bump it up or down.
So in this case, you would see, for example, that there was this period in here
where there wasn't anything pushing those 100 stocks one way or the other.
And then some kind of information came in, and it was positive information,
and that was an accelerant that lifted it.
And then later there was something that pushed it down a little nut.
That's how markets, stock markets, that's how individual stocks and bonds work.
They work on new information that generally has enough of an impact
that traders will act on it in such a way as to get the price to fall.
It was just a little fart of a piece of rumor by one trader,
unless that trader is important or noticeable, it won't do much.
It has to be something that moves oceans, because these markets are huge.
You saw the S&P 500, typical day, three, four billion shares.
It has to be something that moves, has a lot of force,
and has a lot of influence on a lot of traders in the market.
Oh, mother's work is this.
Now, first time we're going to look at an individual stock, NFLX.
Now, I will tell you right now that Netflix plays on, is traded on the NASDAQ.
How do I know that? Four letters.
NFLX, NASDAQ.
MSFT, NASDAQ.
Something like Kroger, KR, that'd be an NYSC.
Two letters, one, two, or three letters, probably NYSC, or an affiliated market.
Let's go look at Netflix and chill.
That was humor, for God's sake.
Humorless crowd. This is a rough crowd tonight.
Okay, now here we go. 12.48%.
That ain't natural. That's a lot of jump.
I mean, most of the time we're dancing, oh wow, it was up a quarter of a percent today.
This one was up 12.44%.
Now, that is really exciting.
Now, what was that about?
The expectation, Netflix was going to announce its earnings.
It had said what it was expecting those earnings to be,
and the market was having its expectation of what was going to happen.
What happened?
Netflix came in with earnings that were way above anyone's expectation.
New information, positive information.
That is a slap in the ass upward in the stock.
That's what drove the stock price up.
No, it wasn't some crossing of MACD lines or something like that, or moving averages.
It's hard, raw information that moves stocks around.
And this was a Jim Dandy of a day.
I mean, that was...
Okay, now we're going to look at some numbers.
And when you look at these numbers, the first week or two,
if you're not experienced with this or you don't do this,
which some of you may do already,
these are just going to look like a mass, well, what the hell does this mean,
or what does that mean, all that kind of stuff.
And I'm going to say this over and over, day in, day out,
to the point where it begins to get into your blood,
where you look, how you think, and how you interpret the numbers.
And I'll give you some different, for some things, somewhat different interpretations.
And this is the lightweight version,
and I'll just keep doing it every day, a little more formally sometimes.
And I'll give you a little more formal definition.
But for the purposes of today, we're just talking,
just a bunch of good old friends at the bar ordering boat drinks
to take out to Cabo San Luca.
First things first, the previous close, that was at the closing bell last night.
The price per share of that stock was $492.19.
Now, back in the day, you would have heard me talk more about round lots.
It used to be that you had to buy 100 shares.
Now, I mean, I'm still stuck in the old school,
you don't have to do it that way anymore.
So, in other words, a round lot of Netflix would have cost you
just a stupid whopping $4921.90 at the closing bell yesterday.
And then it opens at a different level.
Do you see this? Look at this.
That was buying pressure in the overnight and the pre.
And when the bell opened, ding, ding, ding, pop, it was up there at the opening bell.
So, this was the opening price this morning, $537.75.
Now, here's the big one, bid and ask.
The bid is what you can sell a share of NFLX at.
The ask is what you would buy it at.
Now, Yahoo's numbers are wonky, they're not real time,
so it can look a little weird.
And you're saying, well, do you notice something here
that in order to buy a share, you would have to pay $553.86,
but if you sold a share, you would get only $553.68.
Do you see that? Look right here.
Look, see these two right here, bid and ask?
There's your dinner right there.
Now, the reason is simple, and I speak as a former owner of a brokerage house.
I've got to make money some way.
So, you come in here and you say,
I should like to buy a share of Netflix.
And I'll say, well, of course you do.
And I'll say, that'll be $553.86.
And you say, now wait a minute there, fat boy.
I know he just sold you a share, he just sold a share,
and you paid him only $553.68.
So, why am I not getting?
And I'm saying, I want to eat, okay?
I'm kind of big on eating, even if it's spam.
Spam is nutritious, especially the cheese version.
You understand what I'm saying here is that there has to be a bid ask spread.
Now, that is actually for a stock price that high, that is a very tight bid ask spread.
Now, oftentimes, the width of the spread as a percentage of one or the other of them
is going to be dependent upon how much trading activity there is in the stock.
So, in other words, if it's a low volume stock, not a lot of buying and selling,
I'll have a bigger bid ask spread.
I've got to make more money on each trade.
If it's a high activity stock, that bid ask spread will tighten, it'll get really close.
And you'll see that over and over again with stocks.
It's that the bid ask spread kind of tells you how much interest, how much activity there is.
But notice one thing.
You decide, I'm going to buy that for $553.86.
So you buy a share.
And then your significant other walks into the room and says, are you on crack?
We owe rent.
What?
Sell it.
Well, you're going to lose 18 cents.
Yeah, I know, right?
You're going to say, you lost 18 cents?
Yes, evil master.
You understand what's going on there.
You're in the hole.
As soon as you buy a share of stock, you're in the hole.
Right off the bat.
You've got to crawl over the spread.
Of course, this one.
Yeah, interestingly enough.
Yeah, but like I said, don't take the Yahoo numbers too seriously.
You can go to an actual quotation platform like TD Ameritrade, Thicker Swim, or Robinhoods to see the real time.
Because you really don't want to trade if you don't have real time data.
Because things can go really nasty in seconds.
And you didn't know it.
But this is illustrative of the process here.
Now I want you to look at something.
Today's range is, and this is really not too much to talk about at this early hour of the day.
But the stock has swung so far today between $357.07 and $537.07 and $562.50.
So it has had not much, that's not much of a swing.
And if you look at the chart so far today, can you see, see how there's really not been a lot of vol.
There was this spike here.
That was probably the bottom right there was that.
And now probably right there was the peak so far today.
Now the next one.
The 52-week range.
A little more interesting to us.
Over the past 52 weeks, and let me show you one year chart.
Will you stop hawking that crap.
There.
Over the past 52 weeks it has swung from a low of 285.33 to 562.50.
So that 285.33, that's probably that trough right there.
You see it?
That trough right there is parked.
And then the high is right now.
It's at its 52-week high right now.
So in other words asking, well is it closer to its high, 52-week high or 52-week low.
Well right now it's at its high for the last past year.
And notice, you see these are your volume bars.
And you'll notice that oftentimes volume is associated.
See how you had this hard volume through here.
And then this vol right here was part of that spike.
And then you had something spook the hell out of the markets.
But it tends to see this volume spike right here that began this up run, this last run up.
Something got the markets to look favorably.
Some information about Netflix said, well this company is going to go places.
So there was a volume spike there that was the accelerant that pushed it up to where it is now.
Now we can't see the volume spike here.
But I'll bet there will be a heavy one today.
Once we got past today you'll start to see that bar.
But anyway, moving along here.
Volume so far today.
The volume so far today, and remember we're still in the morning, is 15.871 million shares.
The daily average over the last 52 weeks for the whole day was only 4.2, 4.3 million shares.
So in other words this is a very high volume day.
That's all that buying activity on the unexpected earnings report.
Okay now, going over to the other side.
I'm going to just say this now and we'll talk about it a lot more later.
Market cap.
That's the price per share times the number of shares outstanding.
It's the market's measurement of how much ownership, how much the total ownership of Netflix is worth.
It's the market cap.
In accounting we would call that the total stockholder's equity.
But that number will almost never be even close to this number.
The markets don't give a rat's ass what the accountants have calculated.
Because the accountants will basically, they are meaningless to us.
This is what the market says the total value of owner's equity is.
As a matter of fact, give me a second here.
You don't have to worry about doing this.
Real quick.
I have no bookmarks here.
No, not Edgar Allen Poe for God's sake.
Edgar is the reporting system.
And I'll mention a little bit about this.
I'm going to go over here to filings.
This is a primary resource.
You don't go anyplace except here to get financial information.
And the last 10K they filed would be a 10K in January.
Whoa, they're due for a report the next day or two.
But let's just look at them as of last interactive data.
I'm just going to look at this one.
I'll tell a company I can download the Excel sheet of all of its financial statements.
That is awesome.
And we're going to do that.
I'm going to get you so that you can pull down these Excel financial statements like a boss.
Sometimes you've got like 50 tabs, but man, you can't beat it.
And it's primary data.
No other data that you could put in a report or term paper has the quality of this.
Because you are reporting this to the SEC.
And if you lie on these reports, the SEC can make you some hard timers old lady.
Yeah, that's how serious it is.
Let's go down here to financial statements.
I'm going to look at the can anyone just simply say balance sheet anymore?
There we go.
Here is what the total shareholders equity of the company is according to the accountants.
It's 20,777,000,000.
Now here is what the market says the company is worth.
242.308,000,000.
Do you notice there's a little difference between what the accountants say the value is
and what the markets say the value is?
Do you notice a slight difference?
22,000,000,000 the accountants say.
The market says 242,000,000,000.
Now which one is right?
That's pretty easy.
If the book and I disagree, who's right?
You.
Oh yeah, don't even pause on that bro.
You're out on the Africans, on an African safari.
You've got a field guide to animals on the Serengeti.
Here you see a lion coming at you.
I'm going to eat your lions.
You open your guide and it says,
Lions are very tame and they're afraid of people.
They can even be made into pets.
Now who are you going to believe?
The lion who is coming at you with a dinner fork or the field guide?
Yeah, yeah, you see.
Now here's another one.
When you buy a share of stock, are you going to buy it from an accountant or from a market player?
Yeah, the accountant.
I don't know how to do that kind of stuff.
I sit here and play with my numbers.
They let me out two hours every day for sunshine.
No, you're going to easy down the down.
Don't get hurtful.
I'm going to save really great things for battle accountants and slaves.
No I won't.
Yes I will.
Okay, moving on.
Beta, I got, damn it, I can't use beta on this one.
I'm going to have to pull up another one.
I'm going to have to pull up another stock.
If you say Tesla, I will eat you.
Apple.
Well, there we go.
AAPL.
Not a big fan of Tesla?
He of the cloven hoof can't run a company.
I mean he's the biggest con man.
God, that guy.
I mean right now the bankers, I mean in the back channels, everyone is trying to figure out how to quietly get out.
The bankers are on the hook, the brokers on Wall Street are on the hook for hundreds of billions of dollars.
And they can't dump the stock or they will wipe themselves out.
But they want out so bad right now.
Okay, here we go.
Let me show you this.
See this beta?
This is our most important measure of risk of a security or a portfolio.
I don't spend a lot of time on beta, but the concept is simple.
This is the risk of that stock in a well-diversified portfolio.
A 1.00 is the full.
1.00 would be the risk of the entire world portfolio.
If you own everything.
Every stock, every bond in the world.
It's a theoretical 1.00.
And then we use that as the full curve.
If you see a security below one, with a beta below one, we tend to see that as a relatively safe security.
It is less volatile than the market.
But only if you have it in a well-diversified portfolio.
So you can have a stock that has a beta of 0.6, which is well less than the world.
So that would be a very safe stock.
But only if it's in a well-diversified portfolio.
On its own, naked as a single investment, that thing could be a son of a bitch as far as its volatility, its risk is concerned.
Beta is a professional's measure.
We don't talk about metrics of risk in the same way that an amateur would.
It's the difference between talking about the safety features of a car that a professional driver would note and talk about the numbers.
And the things that some hillbilly redneck would say about a car.
He would measure its quality in yee-haw.
We can't do that in the professional world.
We have to talk in terms of what would the responsible marginal investor do.
Well, why do we have to talk about that?
Because those are the Wall Streets, and the Londons, and the Zurichs, and the Hans, and the Hong Kongs.
Those are the ones we are in the world of, because they are the ones who write the rules, make the marginal moves.
So we have to work with their numbers, their terminology, because if we go off on our own, well, they can squash us like an ant.
So we have to use the pro terminology in our business, in our world.
Now this is a step up from where you've been in a lot of your courses, where you go through the course and it's, well, let's talk about the history of the American Revolution.
Or let's talk about the proper grammar for punctuation marks.
This matters beyond us.
We are now, you are now, in the world of us, in the heavies, in the big long house.
Okay, so now we see that Netflix is a relatively risky stock in a well-diversified portfolio, 1.29 beta.
Just remember that one. That one's our biggie.
We have some other metrics of risk too.
One that is kind of popular is the price earnings ratio.
Price of the stock right now divided by the earnings per share of the company.
It's sort of a measure.
One way to interpret it, how many dollars are investors right now willing to pay to claim one dollar of the company's earnings?
Because that belongs to the shareholders, that bottom line does.
So in this case, investors are saying, we'll pay about 32 bucks.
Because we think that one dollar that they earn for us, they'll be able to turn it into about 32 bucks.
That's basically what it's saying in a simple nutshell.
You can get really technical with it, and I don't really care for that.
Now, what's a good PE ratio, what's a bad PE ratio?
Here's the thing, if the price is too high relative to the earnings, well, the PE ratio is going to be way up there.
If the price is too low relative to the earnings, well, the price is going to be, the PE ratio is going to be down there.
So now I'm going to give you my rule, and this is one, this kind of an old school, and you'll have to choose your own.
Generally speaking, if I see a PE ratio that's too high, I say the stock is overvalued.
You know, buy it when it's overvalued, or you sell it if it's overvalued.
If I see that PE ratio is quite low, well, hell, that's undervalued.
And I probably, that would be something I would go and grab.
Well, where's the fulcrum? My rule is 30.
You'll hear some people say 25, other people say 40.
If I see 30 as about fair, the PE ratio of 30 tells me that the stock is near its intrinsic, long-term intrinsic value.
That's just my rule.
And you can choose your own.
Like I said, you'll hear others say 25, 40.
I mean, when I first started teaching back in the early 1980s, we would say a PE ratio of 10 is too high.
But, you know, those days are gone now.
But as you can see, this is actually probably about near its fair market value right now.
Neither undervalued nor overvalued.
And that's just my call.
Now, the EPS, in this case, its earnings per share is positive.
Take total earnings divided by the number of shares. If that's positive, the company's profitable.
If it's negative, the company's not.
Okay, good news.
This company pays a dividend, which means that even if the stock price goes into the toilet, at least you get a check in the mail.
So there you go.
That's how I look at these.
And we'll do this over and over and over again.
Now, I'm going to show you Tesla.
TSLA.
Run by the baked ham himself, baked from his marijuana and ham because he keeps showing off on stage.
Tesla.
What do you see about the beta?
High, right?
That's not just high. That's high AF.
That is high.
Now, that hits that very special level of a high beta where we call the beta stupid.
This is one of the riskiest stocks you can get.
Oh, look at the P-E ratio.
Well, spank me, Jesus. It is overvalued.
Why don't we look at what the market is finally, Cluville has been calling the market.
And well, let's look at the one year. That'll do it.
See how the declining tops and the declining bottoms?
Yeah, the market is slowly trying to peel itself away from this mess over time.
And notice how the volume has been sinking over time, too, as more investors are just quietly selling a few shares and only the fools are buying into it.
And I mean, this is one of the most important rules and it's an informal rule. It's called the greater fool theory.
You're a fool for buying a stock. Your job is to find a greater fool who will buy it from you.
I shouldn't turn you into cynics. Well, yes, I should. I need some people to sit with me and bitch about the world over coffee.
Okay, now, let me take this off. That was enough for one day. I spent more time than I usually will.
And every day we're just going to do this until it begins to bake into you.
Now, let me go through. I keep talking about these things called markets. These things called markets.
I don't even know if these, actually these glass things work or not.
Oh, okay, now let me make sure that I can get off there so I don't have to blame you if it leaves a permanent mark.
Okay, we're good.
Here's the thing. You'll see this a lot in this class where I can divide a word into two sides.
Like later I'll talk about the difference between statutory law and common law, both under the heading of law.
Here I'm going to, I've said a couple of these, but now I want to formalize them.
Money markets, and this is about markets.
Money versus capital markets.
Money markets are short term. Funds that are moving for less than a year, for up to a year.
You hit me up for $20 and you promised you'll pay me back in two weeks. That's a money market.
You have access to money markets.
Many very large corporations access money markets at large scale.
They issue a kind of debt security called commercial paper.
It's due in 30, 60, 90 days and it's a discount paper.
In other words, Microsoft might borrow $9,990,000 and promise to pay back $1 million in 30 days.
That is a huge market, very thick.
See a lot of investing places that have money, the surplus economic units.
They have cash on hand that is just sitting there looking stupid.
They look for these kinds of opportunities to make a little scratch on it for 30 days, 90 days or whatever.
That's a money market.
However, if a company goes out and issues a bond, a 30 year bond for $100 million,
they are seeking funds from the capital market.
30 years is a long time.
That is a very different kind of source of funds than the company,
a money house that has some funds to kick out, to do without for 30 days.
Money markets have their own world.
My teaching assistant recalls the course.
We have a course in short term, cash management.
It's an entire world of its own in the corporate world.
It's a very important place where you get paid a lot of money to know how to work in the money markets,
know what they are, all the different varieties, all the math that's in that world.
Capital markets are their own world.
Okay, so there's one way of the world.
There's one way.
Another market we could talk about, two markets.
Spot versus...
Okay, your book uses the word futures.
It's actually technically not correct.
The right word to use is forward markets.
Now, there are forward markets that qualify to be called futures markets.
Futures are really formal forward markets.
Let me explain spot and forward.
You, sir, you are a coffee grower in Columbia.
And you decide, I'm a roaster, a coffee roaster who has coffee houses all through Chicago.
Now, I need to buy coffee beans.
Now, I could just, when I need them, buy them.
I would pay spot, price.
But instead, I could make an arrangement with you.
I shall buy from you 5,000 pounds of coffee beans at $4 per pound in six months.
And you could agree to that.
That $4 would be a forward price.
These forward contracts are all over the world, all the time.
Making agreements to buy at a specific price in the future.
Now, suppose at that six months, the price of coffee, the spot is $4.35.
Well, you've lost money because you have to sell it to me at $4.
And I've gained because I didn't have to pay the spot at $4.35.
Now, on the other hand, if the price of coffee is $3.75 at spot in six months,
I leave because I have to pay $4.
I could have paid spot at $3.75.
He gained because he sold it at spot.
He would have gotten only $3.75.
However, in fact, both of us win.
You understand?
It doesn't matter what these spot prices.
Because I know six months before exactly what I'm going to pay for coffee in six months.
He knows six months before exactly what he's going to get for coffee in six months.
In other words, the future is not an expectation.
It is a reality.
It makes it much easier for both of us to do our financial planning.
Because no matter what the spot price is, we already know one of the driving forces, the price.
So we have a perfect crystal ball on at least one important number.
For me, a cost, and for you, a revenue.
And that is worth gold.
You know how to look at risk drives price added?
Risk is something we don't want.
Forward contracts make that a moot point.
We know.
So forward markets are rather popular.
And in fact, in many cases, you'll pay spot.
You go for gasoline at the station, you're paying spot.
However, you madam, I'm an employer.
Well, yes, I shall hire you at $60,000 for your first year and then we'll have a pay review.
Well, that's a forward.
Because you know for the next year what you're going to get.
Got it?
So you guys are going to live in a world of both spot and forward.
Prices, markets.
Now another one.
Primary versus secondary.
You will, I don't think, I might be wrong about this,
but I don't think you'll ever be in a primary market.
Well, Facebook did its IPO, and it's a couple of dollars.
And it was bought up.
Boy, the people buying that IPO made a lot of money.
No, they didn't.
There was no one except for the underwriting houses, the IDs, the investment bankers.
You don't buy stock from a company.
You will almost never buy stock from a company.
The primary market is where the company gets the money.
When I go in and I buy Netflix or Tesla or Kroger or Pfizer,
that's a secondary market transaction.
Just some other whole handle, sell it, and me buy.
Or me, go ahead.
I went there and raised.
Well, that's a little complicated because it so usually goes through the IB.
It's a good point though.
Interesting.
No, that was great.
I like that one.
Interestingly enough, but the normal thing is that we trade, we live in the secondary market.
Now, interestingly enough, there is a federal law, and I'll get into that later,
that governs and controls the primary market.
And there's another one that handles the secondary market.
They're not the same.
Players in the primary market are generally, unless it's a private placement,
you have some private company selling some stock.
If it's a public company, those are done by the investment bankers.
A group of investment banking houses works with a company to agree to buy the company's issue of stock.
That's what IBs do.
And then they hold on to it, hype it up, drive the price up, and then they sell it to you suckers and to me sucker.
You see, you don't buy in the offering.
Now, the investment bankers might play through their props and all that kind of stuff.
Hey, you want to get in on the IPO of Facebook?
Well, you're not.
They bought it, and then they're going to dump it to you.
They might also share it with their very powerful, wealthy clients,
so that they all benefit from the pump before the dump.
But, yeah, that's neither here nor there for us right now.
But, yeah, that's primary versus secondary market.
Now, financial versus physical.
Sir, do you ever buy yourself dinner?
Yeah.
Do you visit like electronic dots that you eat?
No.
No, it's in.
Not good food, and health for most of us, not nutritious, or healthy, but that's a physical market.
You buy a share of stock, that's a financial market.
It doesn't exist in reality in a physical form.
It's becoming less and less attached even to something physical.
Now, technically, a stock, a share of stock, represents a share of ownership in a corporation, technically.
But, even at that though, you're just relying upon common and statutory law for that financial asset to have any meaning whatsoever.
Otherwise, it's just a piece of paper.
It's nothing.
So, these rely entirely upon the rule of law and the understanding of the participants in that, under that set of laws.
Now, the next one.
Public versus private.
A private company does not answer to anyone except the IRS, and to its owners, its own owners.
A public company, in order to go public, you go through hell.
And that was one of the things I did as a consultant.
I took little companies public.
You have to fill out ungodly scads of paperwork with the SEC.
You also will have to fill out similar paperwork with the states in which you will offer and sell that stock.
And then, if you qualify, if you are qualified, you will have the privilege of selling that stock to the public.
If you don't go through that process, either one, if you try to raise money selling the stock, either one, you will do it under one of the exemptions that the SEC offers.
Or, you will go to prison.
One or the other.
So, if you are going to just sell ownership, I got some stock in this company, and I am going to see if I can get my buds together to buy some of it so we can start this, get some money going.
You are walking on thin ice.
I mean really thin ice.
I had several clients who went right around my advice and they sold some of their stock to friends and family.
They did not invoke an exemption.
And I will tell you about the exemptions and what you have to do to get those exemptions.
They just went out and sold it and the three top people went to jail for it.
So, if you are going to do a private placement, you damn well better know that you have done it in accordance with the exemptions, with the rules of the exemptions.
That is just the reality of it.
In general though, if you do a public offering, now, if it is the first time you have done it, it is called your IPO.
Your initial public offering.
Now, if you have done one before and you are just selling more stock in your company, that is called a seasoned offering.
Because you have done it before.
You have gone through it.
But you still will have to do all the paperwork.
Now, some companies do a trick where they will register.
This is called registration.
They will register a ginormous amount of stock.
But then they will sell only part of that at any given time over a year or two.
That is called a shelf registration.
In other words, you are registering stock to put it on a shelf and then pull it off and sell it as you need capital.
And it is capital.
Stock markets are capital markets.
It is long term.
Corporations live forever.
So theoretically, you are buying an entity that is going to go on forever.
Now, in the same regard, another term by the way for a private corporation is a close or a closed corporation.
My company, Emergent Light Studio, is a close corporation.
It is an S Corp.
But I would not even dream of trying to sell stock to anyone.
Because it is just a really scary thing.
If you do not have good lawyers behind you and a lot of clout, you can make a mistake and you do not even mean it.
Those guys I told you about that went to jail, they did not mean to make a mistake.
They were some of the nicest guys, smartest, hardworking.
They still went to jail.
And it was partly because the SEC, small potatoes, but the state, all of those were politically ambitious sons of bitches.
And they wanted to have as many feathers in their cap as they could.
So do not make yourself one of their snackies.
Play it clean on that.
Now, in regard to that, there are actually a lot of, even the concept of stock, there is preferred stock and there is common stock.
Normally you will buy in common stock market.
You will buy common stock.
But even within common stock, there can be classes of stock.
You see the stockholders have the voting power to elect and kick out the board of directors.
But in some companies, there is a class of stock that has super majority voting rights.
Which drives you crazy.
Because you will have one share, you will have one vote for each open seat on the board.
Each elected seat.
Now in some cases, in some bylaws, you can concentrate all of your votes on one place.
Like for example, you are the president of the board of directors and you piss me off.
I could use all, I have one share for five seats, I could use all of my five to vote you out.
That is not in all corporations.
But there is also the super majority.
Let me show you something real quick here.
Turn this back on.
We are going to look at a company, are any of you familiar with a company called Berkshire Hathaway?
Run by Warren Buffet.
Now let me show you Berkshire Hathaway B.
These are the baby Berks.
$376 each.
Kind of a pricey stock.
You don't even get a damn dividend.
Look at that, see? No dividend.
Safe, undervalued. Nice.
So in other words, you get a vote for Warren Buffet as the chairman of the board.
And a vote for the other. One vote for each of them.
Well do you think Warren is going to be stupid enough to let control of his baby be that?
Let's look at Berkshire Hathaway again.
Those Berks, that Berkshire Hathaway I showed you, those are called the baby Berks.
Here is a big Berk.
This is one share.
$571,558 for one share.
You have super majority voting rights and you get to sit in the same room and breathe the same air at the annual shareholders meeting as Warren himself.
So you might want to check for a change under the seat of your car if you want to grab up one of these little sons of bitches.
Look at that thing.
You got the money to buy a...
You get super...see that's how he maintains control.
It's because only he and his cronies have these shares.
And Wall Street people, Wall Street players.
So they can keep any baby Berk concentration.
All the baby Berks could get together and they might have 1% of the voting power of the corporation.
So there you go. Kind of sad isn't it?
But anyway, that's that.
One other thing, one last thing.
Public versus private markets.
Now, you can sell...there's one other thing.
What's called restricted stock, founder stock.
If you gave yourself shares when the corporation started or you got shares to give you an incentive to join the company,
those you can't sell whenever you want to.
You are restricted under Rule 144.
And I'll emphasize that more later.
There are only windows in which you can sell a portion of your stock.
Any other time, insider sales would be illegal.
So Rule 144 for restricted stock is stock.
And you get your dividend and all that kind of stuff and it counts for your asset value individually or whatever.
But it's not what we call freely tradeable.
Freely tradeable.
So a private placement.
You sell some stock under the rules, but it's a private placement, you didn't register it.
That's Rule 144 stock, that's restricted.
You can't trade that.
Unless you either register it or you get that window under Rule 144.
That's all I have for you.
Go home.