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Alan Kring Productions in association with the Emergent Lights Studio presents

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the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.

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This is Business Finance, FIL 240 for spring semester 2024.

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Today, Financial Markets and Institutions.

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And I'm going to catch up sort of an amalgam of several different things.

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I'll do a little bit of Chapter 1 and encourage you to capture the rest of it from the textbook

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as we try to slowly catch up to where we should be in the course right now.

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But in almost every class, pretty much every class, the first thing that I will do is I'll say let's look at the numbers.

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And that means that we're going to look at the markets.

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I'm going to teach you the terminology, how you look at the numbers, what numbers are important, what each of the numbers tells you.

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Now at first it won't, it will sound like I'm going way too fast.

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I will keep doing this over and over as I do with a lot of subjects in this course.

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I don't do it just once. I just keep doing it over and over again until you have, you're comfortable with it.

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A little terminology to start with. First things first.

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And a little bit of conceptual background.

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We don't care about numbers and finance. Hardly ever.

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Raw numbers. We care about percentage changes, percentages.

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If you buy a stock for $10 and it goes up by a dollar, it's a very different situation from if you bought a stock for $100 and it goes up by a dollar.

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But $1 really doesn't matter a bit. It's a percentage increase in this case that is telling you the story.

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And so you have these services, the Dow went down 700 points today. OMG. Who cares? That's actually not a very important thing at all.

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That's a ho hum day. We need to know percentage changes.

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Now, next thing. Green up, red down.

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So I can see here, well gee, it's kind of a mixed bag by the end of the day.

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But if markets are going up, or if a stock is going up, or if you think that it's going up or going down, going up, you are bullish.

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You are a bull. It's a bull market.

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Okay, so if it's going down, you're a bearer. We're in a bear market or I'm bearish on this stock.

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That is the term for a sort of a pessimist.

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Now make sure you understand this. You can make money with stocks going up and you can make money with stocks going down.

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There's no difference to me. I don't care which way it's going. All I care about is am I on the right side of the swing.

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That's all that matters to us.

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So unless the markets are going down so much that the zombie apocalypse is about to happen,

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it's not really a concern of mine one way or the other.

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I'll make my dime and if I'm good at it and you're not good at it, I'll make my dime off you.

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You are my lunch money. You have to understand that in finance. You are lunch to us.

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Now other parts of finance, parts of business are more positive.

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Everyone's in this together. In our business, no. I am in this for my own self. My ass wins.

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And that doesn't matter. If you win, that's great. If you don't, that's okay too.

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One thing you have to understand about stocks and bonds, trading.

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The rule that I teach my finance students and they always say, we heard that today at our job, the house always wins.

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Whether you win or not, if it's a casino or a brokerage house, it doesn't matter. The house is going to win.

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Now if you win too, well that's great. But if you don't, I won.

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So I'm going to be able to have a nice evening meal with maybe a martini and get a good night's sleep.

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Even if that means that you're starving to death and your kids no longer call you a parent.

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Parts, yes. But that's unfortunately how it works in our world.

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So now let's look at these numbers here. If you see a number after some letters, that is an index portfolio.

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It is a theoretical or a hypothetical portfolio that's put together for some purpose.

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Like see the Dow 30 there. That is a portfolio, a hypothetical portfolio of 30 of the largest companies in the world.

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These are oligopolies. They will not go away. They are not going to die.

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Smash the industrial machine, wow. These are there forever.

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They're low risk companies. They're low return companies.

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That's the whole thing. Higher risk, higher expected return. Lower risk, you should expect a lower return.

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So these are these giant 30 whales. This used to be called the Dow industrials.

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But the economy of the United States at least has moved much more towards service and entertainment.

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So the Dow 30 of many years ago, maybe some US deals, things like that, well now Disney.

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I think the originators of the Dow industrials would turn over their graves if they knew that a mouse was on their index these days.

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But there you are.

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You notice that the Dow is down just a little bit. It was bull. See how the bulls were running it through most of the day.

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And then just after the lunch hour, the bears took hold and they started to sell off to get out.

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And so it happened. They had their fun and it pushed it down into barely negative territory.

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So are we still trading today? Yeah, we're still trading. It might come back.

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I mean, it's not a very spectacular day. Now here's the Dow S&P 500. It did a little better.

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But at our risk, those 500 companies in the S&P 500, they are very large companies.

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As a matter of fact, those 500 companies have taken together about two thirds of the world's value, equity value, in those 500 companies.

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So that's why oftentimes we'll talk about the market portfolio, this theoretical portfolio of all the world's stocks and bonds.

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The S&P 500 is one of the proxies we use because it's so much of the world's value in 500 companies.

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Taken together, those companies have more value than all the humans on Earth combined.

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It sort of gives you a sense of our insignificance in all of this.

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And then this other one, NASDAQ, that doesn't have a number. That's because it's an actual exchange.

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Like the New York Stock Exchange. These are actual platforms where many, many stocks are bought and sold.

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Now the NASDAQ is purely electronic. There is no physical platform. And it's been around like forever.

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I was using, back when it was the NASDAQ electronic BBS, Bulletin Board Service, back in the 80s and 90s.

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It's been around forever. And it's essentially a place where a market maker can say,

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hey, I've got 600 shares of such and such stock to sell.

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And then all the other hundreds, thousands of market makers around the world, I can pay up 200 of those.

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I'll grab 100. And so, in other words, those borders are filled through this electronic service.

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It is insanely more complex now, run partially by AI, and it does millions of trades, millions and millions of trades every day.

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But it is purely electronic. Unlike the NYSC, the New York Stock Exchange, which is a physical platform.

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You may have seen videos of all these people yelling and screaming and throwing papers and hollering.

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That's the physical platform of the NYSC. It's quite a crazy place. It's not as crazy as it was back in my time,

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and therefore not nearly as fun. But there you go. Now, again, NASDAQ, the NASDAQ, is an exchange, just like the NYSC is an exchange.

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Now, across the world, there are exchanges. Every country has exchanges. The London Exchange, the German Exchange,

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the Hong Kong Exchange, they have their, each has a name, sometimes a Wahao name.

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Now, in Europe, they call, you would more likely hear an exchange called a morse, B-O-U-R-S-E, but that's their word for an exchange.

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And these are in, I'll give you an example. I teach Ministry of Finance and Economic Development Officials

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from West Africa and the islands, the Caribbean. And they, at one point, one of their ministers of finance said,

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well, you know, we have an exchange. I thought, well, I guess obviously they would. And they gave me a website.

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It's just a website where you can go to and see the trading, buy, buy, sell. And I went there. It was like, oh,

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I think there were 12 companies on the exchange. It wasn't anything spectacular at all. And you had trading 10 shares,

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and then about an hour later, there'd be 40 shares. It was nothing spectacular, but that's where it always begins,

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in those kinds of little tiny exchanges that grow as more companies go public and start getting traded on those exchanges.

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And you get more liquidity. In other words, more volume is happening. More money is trading.

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So you get more liquidity, which also helps the markets achieve efficiency, more traders, more people buying and selling help.

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So it all starts somewhere. And in our country, it is at its highest level in terms of volume, in terms of value,

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and all kinds of things like that. Now, I'm going to take you on a little journey here, a little later today in the lecture.

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I'm going to split up markets into this one, this kind, and this kind. But for now, I'm going to take on a commodities,

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as opposed to financial securities, financial markets. Commodities are real things. It could be wheat, hogbellies, diesel.

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It could be silver, gold, oil. Now, what you see in these numbers, see crude oil there? Generally speaking,

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now oil comes in all kinds of grades of quality. I did oil and gas exploration and exploitation with a wildcat group in Texas many years ago.

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We pulled the oil out of the ground in the patch. It was sour sludge, stunk like hell, hot.

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It stunk like the dinosaurs that rotted and naked. It was awful. That's not great.

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Now, on the other end, it's light sweet Brent crude. And that's that benchmark right there. That's the one that they're marking.

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Because all the other prices will move in some degree of synchrony with light sweet Brent. So that's essentially a benchmark oil.

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Now, that tends to move in trading ranges. A few years ago, it was up there over 125, something like that, a barrel.

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And then it has come down over time. That's simply the result of supply and demand conditions.

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Most commodities, the price is driven by the expectations of supply and demand. Not where it is, not where it was a minute ago or a day ago or last week.

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That doesn't matter. History doesn't matter. It's what we expect to happen next.

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If I expect there to be a disruption of oil supply coming out of the Middle East, well, I'm going to start buying the contracts now so that I can make money off the appreciation.

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So in other words, the price will go up now instead of when the supply disruption happens.

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Everything is driven by expectations. If there is no new information, the price will stay on a level ground.

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This is actually an example of one of Newton's, Isaac Newton's laws.

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An object in rectilinear motion will tend to stay in rectilinear motion unless acted upon by a force.

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This is the same thing. The force in financial markets is information.

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If there is new information, it will impact the price.

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If there's no new information, the price is just going to keep going at the same value.

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So wherever you see a movement, that is nothing but a price reflection of some information, positive or negative.

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And because information comes in minute to minute, second to second, and is assessed by the best minds and computers on earth,

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then it's going to be random. It's going to bob, bob, bob, up and down and up and down.

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That's just how it works. Now, as far as the true price goes, the intrinsic price, that you will probably never see.

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It will either be above that or below that. So if you're talking about a stock price, the intrinsic, true value is not what markets are all about.

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I am not looking for truth. I'm looking for my dinner tonight. That's the reality of it. That's the reality of it for every trader.

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We play with the information that is in front of us. But we do know, but that doesn't mean that we're not looking at the long run.

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We know what strategies are successful in the long run. So in finance that I will teach you, it's all about long run, the long run strategies.

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What is the long run price of this stock? Okay, at a given time, is it undervalued or overvalued?

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That tells us how to trade from minute to minute. But it also is based upon the information we have from minute to minute.

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Okay, right now, crude seems to like a trading band between about 72 and 79. It's popped above that a little bit, then it's dropped below that a little bit.

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But it seems to keep finding that area in there. In other words, it's moving around an intrinsic value somewhere in there.

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What it is, oh God, the crude market is complex. If you are in the crude market, you're probably not in any other market because there's so vastly much information on oil and reserve tanks at the source, the pipelines, what's on the high seas,

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what ports are available, that the tankers of different sizes, the very large dirties, the intermediates and all that can access, how efficient the refineries are running and all that.

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What are the competing demands for the oil? Remember that oil can be used to make gasoline, but it is also used to make what are called distillates, diesel, jet fuel, kerosene.

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So at any given time, you might see the price of gasoline low, the price of diesel high. That would be an indication to me that production is going to shift toward the diesel and away from the gasoline.

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So I would expect that within a couple of weeks, the price of gasoline is going to go up a little so that more production is allocated to the distillates, and those prices will be going down a little bit.

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So how we think about these matters, you're always looking to the future and how that impacts what your decisions are now. The past is no guide for us, hardly ever.

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That's why we can't be accountants. We cannot talk about accounting as if it is a guidepost because that discipline requires historical information.

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They report historical information. They report values. Opportunity costs are one of our important factors. Accountants are not allowed to include those.

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That's not generally accepted in the kind of business system we apply. It's not mutually, anyway. In some cases, maybe.

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But, okay, there's crude. Now we're going to look at two other commodities. Now remember that commodities move, the price moves by its plan, demand, dynamics.

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How much is needed? How much is available? However, gold is a little bit different because it is, like silver, used for industrial and cosmetic purposes.

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However, gold has a third hand. It's the crazies who buy it because they think the world is ending. They will say, oh, God, the world is coming to an end.

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Buy gold, hoard it, and bullion it, and all that. And then when it doesn't end, sell it. So there's that other factor.

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And you'll see that in just a second when I come over here to the golden silver market. Look at this one.

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Okay. Look at that. Gold and silver are not tracking. Normally, you know, you have your gold, silver, copper, aluminum, and all those other metal commodities.

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And there's gold doing all kinds of odd things right now, popping around and dropping through the floor because the economy is looking so good now.

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It's a strong, we are in a bull market and the economy has all kinds of good numbers coming out, which is great for all of us.

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And so the gold bugs are saying, screw it. They're selling off gold. Silver is behaving more like silver does, like a commodity would.

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Supply of the silver and the demand for it. Now, there was an odd thing that happened last year.

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These fools on Reddit started saying, buy silver. Say it was a big, big thing. Get in on the silver market.

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And it caused some kind of a pop. The silver traders were saying, to hell. And it was just those guys coming in, buying it, drawing the price up.

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And then when they realized that they'd been taken, they sold it off and they haven't been back bottling the silver market again since then.

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Now, there are a couple here. Euro, USD, and the Great Britain and the pound. Those are currency markets.

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And I will teach you about those later in the course. They are important for our understanding of what expectations are doing in international terms.

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I will go into that now. The next one I'll talk about is the bond market. Now, the bond here is the benchmark 10-year treasury.

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Again, there are lots of different bonds. Thousands and thousands of different bonds. So we use a benchmark that is very reliable, very stable, very trustworthy.

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Now, the odd thing about this one is that chart, see that spark chart? By the way, those little charts, those are called spark charts.

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You can do those in Excel. They're great, little mini charts of data. But in that spark chart, you notice there's something wrong with this one.

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This spark chart, what you're seeing there is not the price. It is the opposite of the price. It's the yield.

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Now, in this course, chapter 7, we go through yield. Yield and price on a bond are mathematically inversely related.

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So if I see that in the green, that means that the price fell because the green is telling me that the yield rose.

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And there's a reason. Why is it, doesn't it work like the other ones? Well, you see in this market, it's a little unique, somewhat unique.

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You see those interest rates, yield is a fancy word for an interest rate. Those 10-year bonds are reflecting prevailing interest rate dynamics in the economy.

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If the yields interest rates are going down, that is beneficial to an economy. Lower interest rates, buy a new car, build a new factory.

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But if interest rates are going up, that's going to slow down an economy. So this chart shows yields because those are what really would impact the economy.

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As I'm seeing right here, I should have paid attention to that. Up, up, yeah it is. You'll notice that the yields started out, down,

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which means prices were up, which means that there was buying pressure in the bond market.

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So yields were down, that means that there was price pushing up that would be investors buying bonds.

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But as the day went along, the investors lost their taste for bonds and they started selling bonds. Hence, the prices started falling,

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and that means that the yields started rising. And I'll do this over and over again. You don't have to try to memorize it.

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I layer a lot of my terminology and my concepts, one lecture after another until you're sick of it. So you remember, just so I can all shut up.

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But, okay, now one other thing. You'll hear 1% interest, 1% in interest rates. You hear me use the term basis points.

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A basis point is 1 one hundredth of a percent. So I can look at this and I can say, well, I mean, yeah, it was up 3.6 basis points.

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Don't worry about the percent. This is the oddball. I can see that interest rates right now on the benchmark 10-year have risen 3.6 basis points.

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Well, that's kind of a whoop-de-do. That's not much. I mean, the interest rates are pretty darn calm right now.

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Overall, interest rates, if you look over a period of days, they are sliding.

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I don't think we're ever going to get back to the interest rates we saw maybe five years ago, 10 years ago.

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Those are gone forever. But at least those insane interest rates where you get a mortgage for 10%, car loans at 12%, that's easing off now.

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And that's good for the economy. Today was a little anomalous. There was a kind of a grouchy move building up in the market.

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There wasn't anything major. Okay, now the next, and this is the last thing, is the overseas markets.

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No, we don't talk about crypto coins in this class. If you want to learn about crypto, you can kiss my ass.

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Full disclosure, I have, I think, 10 NFTs, if you know what an NFT is. I haven't made a damn dime off any of them.

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Hence, what part of me you can kiss. Okay, now, Nikkei. See that 225? That means this is Tokyo exchange.

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That's 225 big important companies on the Tokyo exchange. With or go these companies, so goes the exchange for the day.

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Okay, so you can see that Tokyo was in a grouchy mood from the beginning.

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It just grumpy, started the day down and slid even further down. Every time there was an attempt at a bull rally, nothing happened.

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You notice, interestingly enough, you see that principle that there was information that drove, that was adverse.

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Then the bulls grabbed a hold of some information and then the bears said, ehh.

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And then for a long period through the training day, there was nothing that would move the market one way or the other.

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So it stays in rectilinear motion, just like Newton's law explained. And then something got the bears all kinds of excited.

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And they rushed in and had a party for a little while. And then pretty much dead, a little bit of positive and negative,

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bears and bulls fighting over the end. But overall from beginning to end, the Nikkei 225 was down about.8%.

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That's not spectacular. I mean, yeah, it's enough to get your attention.

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But when a horrible day would be what we call a black swan, 5%, 10% down.

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Anything less than that, I've lived through enough black swan. Anything less than that, it's just a grouchy day.

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But then, remember, this is happening last night when we were all asleep.

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And then as the sun set in Tokyo, it began to rise across Europe from east to west.

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And then the sun came up in London, the Financial Times.

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100 stocks in Tokyo on the London estate. And those traders, the bell rang there, the morning bell.

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And they started trading. And as you can see, that was not anywhere like what happened.

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You notice that immediately the index price point was up, right off the bat.

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And then there was some sell-off a little bit. But then the bulls took back over.

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There were some quiet periods and some spikes. And then it finished quiet.

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And by the end of the day, it was up, hey, nothing major, about half a percent for the day.

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A bull day. Not a spectacular bull day, just a bull day.

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And then as the sun set in the British Isles, it rose on the east coast of the United States and all markets woke up.

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And our bell, morning bell rang. Now understand that in the markets, in any market,

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there is the official time from the opening bell to the closing bell.

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But that's not the only time the trading happens.

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There is the aftermarket, where orders for buys and sells are coming in.

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And then the pre-market, where buy and sell orders come in.

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And then when the bell rings, those orders are filled.

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If there are more buys than sells, the market will pop and it will be up at the bell.

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If there are more sells than buys, it will be down at the bell.

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So the closing price and the opening price the day before, and the opening price of the current day, will be different.

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And that's that post and that after and pre-market activity being filled when the bell rings.

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So that's how that works.

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Now, to take this a little step further, I want to take you on a journey for a couple of stops.

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So that I can have you look at numbers. And we're going to do this every day.

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Again, I don't expect you to memorize everything that I do in one class or in five classes.

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It comes to you. It sinks in as time goes along.

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That's the best way to teach and the best way to learn.

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So picking a stock out of nowhere.

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Does anyone know of a company that had a major thing happen today?

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It was Netflix.

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You see, every company gives an estimate of the earnings that it will report for the end of the quarter.

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And so market participants react to that information.

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Netflix said, well, we think our earnings will be pretty good.

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So the market said, okay, we'll push the price up on the expectation.

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So if a company then reports bad earnings, but actually happened, or better earnings,

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then the market will have to react very rapidly.

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In the case of Netflix, they reported earnings.

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They had estimated their earnings.

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And when the earnings came out, earliest when I think it was, oh, they were much better.

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And so the bull just went cuckoo banana.

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You got to call it a moo, moo.

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I need an order filled, buy, buy.

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So the opening and the closing price would be, the closing price for last night and the opening price for today

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would be very different because of the pressure, the differential pressure of the buy over the sell order.

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So let's Netflix and chill.

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Really? That was a good joke.

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Wow.

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The hell with it.

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Humorless crowd.

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And that's Netflix.

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Now, before I take it up, notice how many letters are in that type, in that.

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N, F, L, X, that's four.

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That means, that tells me it's a NASDAQ stock.

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If it's three, two, or one, that's probably an NYSE stock.

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That's how it works.

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So think about this.

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Remember, the NASDAQ is almost all small, risky, scrappy public companies.

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But M, S, F, T, A, M, Z, N, there are a few giants in the NASDAQ.

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It's like having a continent full of dwarfs and you have a couple of T-Rexes thumping around in there.

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But Netflix was, when it started, a small cap company, a small company.

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And then suddenly it got a hold because movies and some great series,

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until it started canceling good ones like Shadow and Bone.

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Not funny, Netflix.

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Okay, anyway.

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Okay.

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Ten and a half percent up for the day.

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Look at that.

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Okay, now notice that the close yesterday was $492.19 and today it opened pop.

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You see that pressure?

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Because the good news came in before the market opened.

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So the pre-market was building up an imbalance of buy over sell orders, pushing the price up.

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And we got up, we actually, it was up almost 12% early on and then it lost some of its mojo.

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But notice what happened.

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That information got impounded and then the rest of the day it just kind of drifted.

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You had some profit taken near the end, you know, selling off, taking your win and getting out

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before something bad happened to you.

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But, so there you go.

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Now, a couple of things here.

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First of all, bid and ask.

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The bid is what you will buy the stock at and the ask is what you will sell it at.

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I'm sorry, the bid is what you will sell a stock at.

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The bid is what you will buy it at.

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So if you sold a share of Netflix, and by the way, Yahoo's numbers are all wonky,

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they're not real time, and they can be messy and wrong, but it's okay for just illustrative purposes.

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Notice that the bid, if you wanted to sell a share of Netflix, that would cost, you would get $544.84.

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If you wanted to buy a share of Netflix, you would pay $545.45.

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You notice there's a spread.

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Sixty-one cents is the bid ask spread.

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Now, that's actually relative to the price, that's a fairly tight bid ask spread.

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But why would there be a bid ask spread?

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Because the broker had to make a scratch.

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That's the whole point.

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You know, I want to buy it from you at a lower price and then sell it to you at a higher price.

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That difference in there, that's my dinner tonight.

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And if there's more and more trading, the bid ask spread will tighten,

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because I don't need to make as much on any given trade.

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If trading is thin, then the bid ask spread will be pretty wide,

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because I'm not getting as many trades, so I have to charge more on each trade.

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But so, in a way, you hear this thing, we have no fee for trades on our service.

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They all say this now, well, bullshit.

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They've got their ways of making money.

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Come on.

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We're not charity.

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We are there for our purpose.

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So imagine this.

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You, sir, you decide you're going to buy a share of NFLX.

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You put it, yeah, I want to buy one share of NFLX at market, so you pay $545.45.

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A minute later, your significant other comes in and looks at your screen.

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You spent $545 of our money, hits you up the side of the head, and rings your bell.

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Sell it.

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We need to pay the rent.

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Okay.

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Well, you've lost money, right?

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Yeah.

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So in other words, whenever you buy a stock, you're automatically in the hole.

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You've got to crawl back over that spread before you're going to make a dime off that stock.

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And so you have to admit that you wasted $0.61.

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Okay.

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That's the basic framework.

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Now, let's go down here.

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The days range in price.

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That would be from the lowest price to the highest price.

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If you look at this day right here, that would probably be that $560.50.

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That's how high it went.

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And the low, actually probably right about in this trough right here, would be the $537.07, right about in there.

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Now, the next one is the 52-week range.

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So if I look at the one year, it was as low as $285.33.

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That would be that trough right there.

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You see it?

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$285.33, that would be the low over the past year.

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Well, the high is where the highest it got today because it's just been on a tear all day long going on, running.

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Now, another thing that I would mention, these are volume bars.

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And this is a one year, so they encompass a few days of vol in any given case.

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You notice that there's kind of an indication.

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Notice this volume bar here was associated with the end of a drop, of a bear pull on the stock, signaling run upward.

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Here you see another spike that seems to have been when the market started getting a little worried.

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But then you had a bull spike, and then you had this bull spike right here.

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Now, if you look back here to just today, the one day, it's not easy to see here, so I'll go full screen on it.

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You see all that volume was in the early trading, and then it sort of petered out, pissed its way down all day long.

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That was that information being turned into price through purchases of the stock.

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You're seeing the dynamics.

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In our world, information is the thruster on the rocket engine.

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And if you turn the thruster off, it just floats.

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It goes at the same speed ever after that.

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So, getting out of full screen, the next thing we look at is the volume.

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Now, today's volume was 26 million shares.

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Okay, that's pretty serious.

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The typical day over the last year, it was about 4.2 million shares.

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So, you can see that high volume that was the result of that extra punch of information that triggered all the buy and the volume increase.

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So, today's volume was about what, six times, five and a half times the volume on a typical day over the last year?

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Yeah.

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Okay, now, the market cap.

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You don't need to worry about the definition of it.

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It is the price per share times the number of shares outstanding.

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I'll formalize that later.

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Don't sweat that.

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Interpreting it, this is the market's assessment of the total value of ownership in the company.

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Price per share times the number of shares outstanding.

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So, the market is assessing the value of ownership, all the ownership of Netflix at $238 billion.

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Now, let me show you something very quick here.

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This is the market's total shareholders equity.

353
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Now, I'm going to run over here.

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Don't write this down because I'll be doing this plenty later.

355
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Oops, shut up.

356
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I'm going to go over here to the SEC where all public companies must report their accounting information.

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And they have to do it truthfully.

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This is primary data.

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Anyplace else you would get the financial information of a company would be secondary.

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This is the one that is primary.

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One reason for that is pretty simple.

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If you lie to the SEC or if you misstate something to the SEC, if a company does,

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not only can the company be fined, but the board of directors and the executive suite can be fined and they can even go to prison.

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So, they have a very big incentive anymore not to lie.

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00:43:08,000 --> 00:43:14,000
So, I'm going to look at just a quick snapshot of financials.

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Now, every public company, and I'll go through this all later, must provide all of its financials in Excel format for anyone on earth to download.

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Sometimes you've got 50 tabs.

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It's like, the hell have I started here?

369
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But it's all available to you.

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You don't have to key in the data.

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You don't have to go and copy and paste data.

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It's all in Excel for you.

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But they have summaries right here.

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Will someone tell me where the stupid balance sheet is?

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Now, total shareholders' equity.

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Now, the accountants say that the total value of the equity is about $20.78 billion.

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00:43:58,000 --> 00:44:09,000
The market says that the total value of the equity is $238.48 billion.

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You see a little discrepancy?

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They're reporting the same thing, the total shareholders' equity.

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00:44:17,000 --> 00:44:25,000
And yet, the market says it 10 times what the accountants say it is.

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Who's right?

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It's kind of simple.

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You, sir, have gone on a safari.

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You're on the Serengeti, and you've got your field guide to the animals of the plains of Africa.

385
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And you see a lion.

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It's coming at you.

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And it's got a dinner fork.

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And a little bib with a picture of a human on it.

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But you look in your field guide and it says,

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lions are actually very shy animals and they tend to avoid human contact.

391
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Never fear a lion because it can be your kitty if you're nice to it.

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And then you look up, and it's right, I am going to eat your loins.

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Which are you going to believe?

394
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The lion or the field guide?

395
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Yes, the lion.

396
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The lion will sleep tonight because it had a meal, and that meal was you.

397
00:45:28,000 --> 00:45:34,000
Another way to think about it, madam, you're going to buy a share of Netflix, let's say.

398
00:45:34,000 --> 00:45:37,000
Well, let's say, okay, let's talk about that.

399
00:45:37,000 --> 00:45:39,000
Who are you going to buy it from?

400
00:45:39,000 --> 00:45:48,000
The accountant sitting in the little cubicle looking forward to the hour he gets let out for sunlight?

401
00:45:48,000 --> 00:45:54,000
Or me, the trader who's got the stock to buy and sell?

402
00:45:54,000 --> 00:45:56,000
Yes.

403
00:45:56,000 --> 00:45:59,000
Now you understand why we don't care.

404
00:45:59,000 --> 00:46:02,000
We don't care about that data.

405
00:46:02,000 --> 00:46:08,000
You're going to buy in the market, in the fire and shrapnel that is every minute of every day,

406
00:46:08,000 --> 00:46:11,000
not in the quiet, mutant counting room.

407
00:46:11,000 --> 00:46:14,000
Now, don't get me wrong, I'll praise the accountant's later,

408
00:46:14,000 --> 00:46:21,000
but first I have to get you to understand why we have to look at the markets themselves.

409
00:46:21,000 --> 00:46:26,000
Now, I'm going to have to switch to another company here to show you the rest.

410
00:46:26,000 --> 00:46:41,000
I'm going to do that company run by he of the cloven hoof, Tesla.

411
00:46:41,000 --> 00:46:52,000
First things first, beta is our measure of the risk of a stock or a portfolio.

412
00:46:52,000 --> 00:46:56,000
The full curve is the number 1.00.

413
00:46:56,000 --> 00:47:01,000
That is the risk of the hypothetical world portfolio.

414
00:47:01,000 --> 00:47:09,000
You earn everything if you held everything in proper balance, that would be a 1.00.

415
00:47:09,000 --> 00:47:12,000
So anything above a 1.00 is risky.

416
00:47:12,000 --> 00:47:19,000
Anything below a 1.00 is relatively not risky.

417
00:47:19,000 --> 00:47:20,000
See that?

418
00:47:20,000 --> 00:47:24,000
What's the beta of Tesla?

419
00:47:24,000 --> 00:47:27,000
2.32.

420
00:47:27,000 --> 00:47:32,000
Technically, we would say that one is risky AL.

421
00:47:32,000 --> 00:47:35,000
I mean, we get sweaty at 1.25.

422
00:47:35,000 --> 00:47:39,000
1.5, that's only for real risk takers.

423
00:47:39,000 --> 00:47:41,000
This stock is insanely risky.

424
00:47:41,000 --> 00:47:44,000
Now, the next one, price earnings ratio.

425
00:47:44,000 --> 00:47:47,000
Price divided by earnings.

426
00:47:47,000 --> 00:47:48,000
It is a measure.

427
00:47:48,000 --> 00:47:53,000
Look, if the stock price is very high compared to the earnings,

428
00:47:53,000 --> 00:47:56,000
we would consider that to be over a balance.

429
00:47:56,000 --> 00:48:01,000
A stock that is very low, price is very low compared to earnings,

430
00:48:01,000 --> 00:48:04,000
we consider that to be under a balance.

431
00:48:04,000 --> 00:48:07,000
So where is the full curve on this?

432
00:48:07,000 --> 00:48:10,000
Well, you'll hear different analysts say different things.

433
00:48:10,000 --> 00:48:12,000
They're mostly at the same ballpark.

434
00:48:12,000 --> 00:48:16,000
I use 30 as the full curve.

435
00:48:16,000 --> 00:48:21,000
Any PE ratio above 30 is overpriced.

436
00:48:21,000 --> 00:48:27,000
If it's below 30, I consider it to be underpriced.

437
00:48:27,000 --> 00:48:31,000
You know, it's kind of a relative.

438
00:48:31,000 --> 00:48:34,000
29.3, well, that's about 30.

439
00:48:34,000 --> 00:48:37,000
But look at Tesla.

440
00:48:37,000 --> 00:48:39,000
Let me see.

441
00:48:39,000 --> 00:48:41,000
Price earnings ratio.

442
00:48:41,000 --> 00:48:43,000
67.

443
00:48:43,000 --> 00:48:45,000
That is overbound.

444
00:48:45,000 --> 00:48:49,000
That is insanely, that's saying the price is way too much

445
00:48:49,000 --> 00:48:52,000
for the earnings that company is making.

446
00:48:52,000 --> 00:48:57,000
Another reason why analysts like me, we're not,

447
00:48:57,000 --> 00:49:00,000
we don't have an opinion, well, I do, about Elon Musk.

448
00:49:00,000 --> 00:49:02,000
He's safe and spawned.

449
00:49:02,000 --> 00:49:10,000
But the objective reality is that this stock is insanely risky.

450
00:49:10,000 --> 00:49:14,000
You shouldn't have this stock unless you have a lot of money to lose,

451
00:49:14,000 --> 00:49:17,000
and it is way overpriced.

452
00:49:17,000 --> 00:49:21,000
This price is asking to still drop.

453
00:49:21,000 --> 00:49:25,000
The only reason it's still as high as it is, and it has been falling,

454
00:49:25,000 --> 00:49:28,000
is that so many brokerage houses on Wall Street

455
00:49:28,000 --> 00:49:32,000
and so many heavy investors have put so much money into it

456
00:49:32,000 --> 00:49:38,000
and banks that they can't dump or they would wipe out their balance sheets.

457
00:49:38,000 --> 00:49:43,000
So they're quietly over the next few years going to shed their stock

458
00:49:43,000 --> 00:49:48,000
and hope that they can find enough suckers to buy it from them at a decent price.

459
00:49:48,000 --> 00:49:50,000
But that's the reality of it.

460
00:49:50,000 --> 00:49:52,000
That's where we do it.

461
00:49:52,000 --> 00:49:55,000
That's how we handle it.

462
00:49:55,000 --> 00:50:00,000
Okay, enough of the stock stuff for today.

463
00:50:00,000 --> 00:50:04,000
Now I've got a couple of distinctions to make,

464
00:50:04,000 --> 00:50:12,000
and I've already done a few of these, and I want to cover just a few more.

465
00:50:12,000 --> 00:50:17,000
Markets.

466
00:50:17,000 --> 00:50:23,000
You have money versus capital.

467
00:50:23,000 --> 00:50:30,000
Money markets are markets for short-term, one-year or less funds.

468
00:50:30,000 --> 00:50:35,000
Capital is funds for long-term investments.

469
00:50:35,000 --> 00:50:41,000
A number of companies borrow money for 30, 60, or 90 days.

470
00:50:41,000 --> 00:50:45,000
They do it by issuing what's called commercial paper.

471
00:50:45,000 --> 00:50:49,000
There are a lot of corporations that have money available.

472
00:50:49,000 --> 00:50:53,000
They don't have it for a long time, but they don't have to pay bills for a few months.

473
00:50:53,000 --> 00:50:59,000
So what they'll do is they will lend a Microsoft, an Apple, or a Netflix,

474
00:50:59,000 --> 00:51:06,000
or some big company some money that that company needs for a few weeks or a few months.

475
00:51:06,000 --> 00:51:08,000
That's a short-term market.

476
00:51:08,000 --> 00:51:14,000
A capital market is where a company might issue 30-year bonds,

477
00:51:14,000 --> 00:51:21,000
or it's where you would get the funds to borrow for a house or a car.

478
00:51:21,000 --> 00:51:23,000
That's a very different kind of investor.

479
00:51:23,000 --> 00:51:31,000
Those are long-haul investors, the ones who have funds that they want to put away for a long period of time.

480
00:51:31,000 --> 00:51:34,000
Another distinction.

481
00:51:34,000 --> 00:51:40,000
Spot versus, now the book uses the term futures.

482
00:51:40,000 --> 00:51:42,000
This is incorrect.

483
00:51:42,000 --> 00:51:52,000
Futures are only a small part of what is broadly called forward markets.

484
00:51:52,000 --> 00:52:00,000
When you buy gasoline, madam, you buy at spot where we're prevailing crisis.

485
00:52:00,000 --> 00:52:06,000
However, suppose instead that you are a coffee grower in Colombia,

486
00:52:06,000 --> 00:52:13,000
and I am a coffee roaster with many outlets in Chicagoland.

487
00:52:13,000 --> 00:52:19,000
Now I could buy coffee beans at spot, but I could otherwise call you and say,

488
00:52:19,000 --> 00:52:21,000
I'll tell you what they're going to do.

489
00:52:21,000 --> 00:52:32,000
I'd like to make an arrangement that I will buy 5,000 pounds of coffee beans from you in six months at a price of $4.

490
00:52:32,000 --> 00:52:39,000
That $4 would be a forward price because it's a price in the future.

491
00:52:39,000 --> 00:52:44,000
Literally hundreds of thousands of forward contracts happen all the time.

492
00:52:44,000 --> 00:52:51,000
Companies might want 10,000 bushels of corn, but they don't want it now.

493
00:52:51,000 --> 00:52:53,000
They want it in six months.

494
00:52:53,000 --> 00:52:57,000
So they would work with a broker to arrange in six months,

495
00:52:57,000 --> 00:53:02,000
you will deliver this corn to me at this price promotion.

496
00:53:02,000 --> 00:53:05,000
That's gasoline.

497
00:53:05,000 --> 00:53:08,000
You buy that at spot.

498
00:53:08,000 --> 00:53:13,000
However, you, madam, are going to become some career professionals.

499
00:53:13,000 --> 00:53:16,000
Your first job, I'm going to hire you.

500
00:53:16,000 --> 00:53:24,000
Well, yes, your salary will be $80,000 a year for the first year, and then we'll have a pay review.

501
00:53:24,000 --> 00:53:26,000
That's a forward.

502
00:53:26,000 --> 00:53:33,000
You see, because you are guaranteed that price each month for 12 months.

503
00:53:33,000 --> 00:53:38,000
So that's technically 12 forward contracts.

504
00:53:38,000 --> 00:53:42,000
So we live in both worlds all the time.

505
00:53:42,000 --> 00:53:47,000
A lot of things we buy at spot in the grocery store, you're buying everything at spot,

506
00:53:47,000 --> 00:53:53,000
but there are other places where you're buying on a forward.

507
00:53:53,000 --> 00:54:05,000
Another one, primary versus secondary.

508
00:54:05,000 --> 00:54:09,000
The primary market is the market in which a company sells stock,

509
00:54:09,000 --> 00:54:15,000
an IPO, initial public offering, or a seasoned offering.

510
00:54:15,000 --> 00:54:17,000
They don't sell those to you.

511
00:54:17,000 --> 00:54:21,000
That stock, you do not buy stock at a primary market.

512
00:54:21,000 --> 00:54:24,000
See, that's bought by the investment bankers.

513
00:54:24,000 --> 00:54:26,000
Facebook goes public.

514
00:54:26,000 --> 00:54:28,000
It's underwriting syndicates.

515
00:54:28,000 --> 00:54:32,000
It says, okay, we will take all that stock and give you the money for it.

516
00:54:32,000 --> 00:54:37,000
And then they sell it to you after they've pumped up the price and hiked it.

517
00:54:37,000 --> 00:54:40,000
That's how the market works.

518
00:54:40,000 --> 00:54:45,000
When you buy stock, Netflix or something like that, that's a secondary market transaction.

519
00:54:45,000 --> 00:54:47,000
It's just someone selling it, and you buy it.

520
00:54:47,000 --> 00:54:50,000
The company doesn't have anything to do with that at all.

521
00:54:50,000 --> 00:54:56,000
The secondary market is where we live a lot, not in the primary market.

522
00:54:56,000 --> 00:55:03,000
That's for the big dogs of Chicago, New York, LA, places like that.

523
00:55:03,000 --> 00:55:07,000
That's where that happens.

524
00:55:07,000 --> 00:55:09,000
I think that's enough for today.

525
00:55:09,000 --> 00:55:21,000
Thank you for being here.