Category: Finance 101

How investment bankers do itWhen investment bankers advise companies on valuation, or when hedge fund analysts analyze companies to decide which ones to buy, they use “valuation multiples.” These are basically the same thing we did above. There’s a term called “enterprise value”. This is different than the value of the company to shareholders or… Continue reading Part 7: How it works in real life →

Everything so far has been in the form of a story. Math helps us conceptualize things in a way that makes it easier to think about more complex situations. Time Value of MoneyWe said earlier that we could buy $100,000 of US Treasury bonds and receive $4,000 per year. After one year we would receive… Continue reading Part 6: Fun math time →

We can take various types of investment opportunities and put it on a graph. On the Y-axis (the vertical bar on the left), we can put the rates of return of each of these investment opportunities. On the X-axis (the horizontal bar on the bottom), we can put the risk associated with this investment. Risk… Continue reading Part 5: What do I invest in? →

The general idea is that you want to maximize return and minimize risk. That is, you want that $50,000 to generate the most amount of money each year as possible, with the least amount of risk as possible. In finance, we call this the “Sharpe Ratio” after William Sharpe. This ratio is: Expected return divided… Continue reading Part 4: But how do I know I’ll make money? →

Stocks: Starting a business with friends Often times, people start companies together with friends or family. How do you “split” things up in a way that’s fair to everyone involved? What’s fair and unfair can get hairy, and different countries and cultures have different takes on this. In the U.S. and other Western countries, the concept… Continue reading Part 3: Stocks and Bonds →

Woo-hoo! You open a lemonade stand 🍋Imagine you have a lemonade stand. You sell each cup for $5 and it costs you $1 per cup. Each year you sell 1,000 cups of lemonade so that you make $5,000 in sales and incur costs of $1,000. Your net profit is then $4,000 per year. $5,000 in… Continue reading Part 2: What’s a lemonade stand worth? →

One of the coolest concepts I learned while studying Economics at UC Berkeley was the idea of “the brain’s interest rate.” This was the idea that different people have different “internal interest rates” that they require for different risk and return combinations. This means that some people are fine getting a 5% return per year,… Continue reading Part 1: Investing vs. Gambling →