Money Management Skills

26

Lecture 4: The Key Financial Instruments

% $QRWKHUZD\WRWKLQNRIWKHVWRFNPDUNHWLVDV\VWHPZKHUH\RXOHQG

money to a corporation, which uses the money to hire managers and

workers to create a product, and then sells the product back to you

DQGSD\VEDFNSDUWRIWKHSUR¿WWR\RX²WKHLQYHVWRU7KDW¶VWKHZD\

DZHOOIXQFWLRQLQJFDSLWDOLVWV\VWHPZRUNV&LWL]HQVSURYLGHWKH

FDSLWDOWKDWWKHQJRHVWRLWVPRVWHI¿FLHQWXVHWRPDNHWKHSURGXFWV

SHRSOHZDQW

% 6WRFNVDQGERQGVDUHWKHLQVWUXPHQWVZHXVHWRSURYLGHFDSLWDOWR

DFRUSRUDWLRQ$VWRFNJLYHVXVDWKHRUHWLFDOVKDUHRIRZQHUVKLSRI

WKDWFRPSDQ\,QUHDOLW\LWGRHVQ¶WJLYHXVPXFKEXWLI\RXRZQ

enough stock, you can vote on the board of directors, and for every

share of stock, you receive a dividend that is a percentage of the

SUR¿WVHDUQHGE\D¿UP6PDOOLQYHVWRUVRZQDWLQ\VKDUHRIWKH

YDOXHRIWKDWFRPSDQ\

% 7KHYDOXHRIDFRPSDQ\LVVXSSRVHGWREHKRZPXFKSUR¿WWKH

PDUNHWH[SHFWVWKHFRPSDQ\WRHDUQLQWKHIXWXUH6RPHFRPSDQLHV

GRQ¶WHDUQDQ\SUR¿WULJKWQRZ6RWKHPDUNHWKDVWRJXHVVKRZ

VXFFHVVIXOWKHFRPSDQ\ZLOOEHLQWKHIXWXUH6WRFNVZKRVHSUR¿WV

DUHH[SHFWHGWRJURZLQWKHIXWXUHDUHNQRZQDVJURZWKVWRFNV

% 9DOXHVWRFNVRQWKHRWKHUKDQGWHQGWREHROGHUGLYLGHQGSD\LQJ

SUR¿WDEOH FRPSDQLHV ZKRVH HDUQLQJV DUH QRW H[SHFWHG WR MXPS

LQWKHIXWXUH$QGIUDQNO\PDQ\RIWKHPDUHERULQJ%HFDXVHRI

this, the prices of value stocks tend to be fair, and they tend to

RXWSHUIRUPRYHUWLPH

% The best way to invest in stocks is either through a mutual fund

or an exchange-traded fund, which is similar to a mutual fund in

concept but trades on the market instead of issuing and redeeming

VKDUHVWKURXJKWKHIXQGLWVHOI

% 7KHUHDUHWZRW\SHVRIPXWXDOIXQGV$FWLYHO\PDQDJHGIXQGVKLUHD

fund manager to choose which stocks to buy and when to buy or sell

WKHP$ERXWSHUFHQWRIDOOPXWXDOIXQGVDUHDFWLYHO\PDQDJHG