ShmoopTube

00:02

Principles of Finance a la shmoop... inside Wall Street alright people we're

00:09

gonna take you inside the world of Wall Street with a few career snapshots so [Man presenting inside the walls of wall street[

00:13

that when you have a sense for how that world works and the reason that people

00:17

inside of it earn so much freaking money...Pale that's a good word to

00:23

describe most investment bankers they don't see the sun all right instead

00:27

bankers get cathode ray and LCD tans why well they have mounds and mounds and [Investment bankers office desk cluttered with work]

00:33

mounds of work and a lot of it is just busy work making financial models that

00:38

nobody really reads ie if this company grows at the rate that the CFO says

00:44

it'll grow well how much cash will it produce the next five years and how

00:48

could we help you put that cash to work for a small fee yeah they make pitch [baseball player catches pitch book]

00:53

books that you know kind of pitch a lot of business to clients well you should

00:58

sell your company to X Y Z mega glop Corp today for twenty three dollars a

01:03

share because competition is coming and they'll devour you

01:08

yeah all right and you make a lot of coffee, green, sugar

01:11

yeah that's what they do for clients investment bankers though do one primary

01:15

thing they sell money think about it as a more complex form of those machines [Boy carrying a sofa]

01:21

that convert your couch change into bills for every dollar they convert from

01:27

coin to paper they take a few pennies well that may not seem like much unless

01:33

you frame it in the context of how big banks work imagine converting 10 billion

01:38

dollars a day that's a lot of pennies all right well what about financial [Financial analyst appears with magnifying glass]

01:42

analysts inside the bank how do they work well the lion's share of financial

01:46

analysts work on Wall Street for buy side or sell side firms a buy side firm is a

01:53

mutual fund hedge fund or other investment entity charged with actually

01:58

managing the money for an individual... sell-side firms there are people like

02:04

stockbrokers who basically sell money for a living well financial analysts on

02:10

the buy side are trying to find a rationale to actually buy something to [Financial analyst approaches a baby with a lollipop]

02:14

make an investment to take risk to figure out if or how a given investment

02:18

opportunity is cheap they might ask questions like well is the world just

02:24

panicked for no good reason is there something fundamentally wrong with

02:29

this company is it actually just fairly priced for all the risks involved so

02:34

that's the world of a buy side analysts they're gonna figure out whether or not

02:37

they want to write the check and live or die with their own investment financial [Person clicks buy now for stocks]

02:42

analysts on the sell side get paid well in large part based on the volume of

02:47

commissioned dollars they generate that flow through the desk that they cover so

02:52

if you follow the media industry for a large investment bank much of your power [Woman analyst watching TV and eating popcorn]

02:56

and pay will derive from the buy-side firms simply liking the work you do like

03:02

And you might even get

03:06

a good job sticker.....Alright well there's a subtle but important

03:11

difference here in the impetus behind the reports of financial analysts create

03:16

one is about stock ownership that's buy side the other is about transacting and

03:23

generating commissions that's the sell side financial analysts

03:27

want to run money that is they want to become portfolio managers the backstop [Financial analyst woman in a gym]

03:32

the last word the last person standing ultimately they want to make money run

03:37

right into their wallets by producing good investment returns where they take

03:42

you know a small fee rich, greedy, gun-slinging, narcissistic, powerful, tough

03:47

smart, hungry all right well what are eight words that describe my future

03:51

spouse Alex from Jeopardy especially if your future spouse is a hedge fund [Hedge funder appears from the fire]

03:56

manager well for most hedge funds the fund itself charges two and twenty which

04:01

means they take a 2% fee per year and then after fees are paid they take an

04:08

additional 20 percent of the profits of the fund in any given year as an

04:13

incentive fee which really just boils down to more

04:17

fee so fund managing five hundred million dollars has a solid year and is

04:22

up twenty percent they finished the year with six hundred

04:25

million dollars in AUM or assets under management...

04:29

they'll have charged a bit over ten million dollars in fees that 2% on that

04:34

500 million thing those fees pay the salaries of the financial analysts and [Financial analyst and secretaries appear]

04:38

the secretaries and the lawyers and the rent and the computer costs and all that

04:41

stuff hedge fund managers don't get rich on

04:44

the fees the fees just cover their day-to-day expenses but they do get rich

04:48

on the carry a fancy word for incentive fee and you thought Bank America was [woman attempting to take money out of ATM]

04:54

fee hungry... alright well what do you do all day hedge fund manager wake up there

04:58

you trade stocks so you can tell people that you you know invest but that's not

05:05

really the case for most hedge funds because they have to be sensitive to

05:09

monthly performance that is the industry forces them to be short-term greedy as

05:14

opposed to long-term greedy so they trade a lot really invest just a little

05:19

and well it's a great gig if you have a short attention span all right on to [Hedge fund manager sees butterfly and runs away]

05:24

mutual fund managers - mutual fund managers spend their days meeting with

05:29

company management going to conferences and listening to their propaganda or

05:33

information presentation and then they make financial models which estimate

05:37

future earnings usually based on those estimates while they'll make investments

05:42

or at least recommend investments to their portfolio managers to capture

05:45

growth in stock prices your time horizon is much longer you're actually investing [Mutual fund manager stood outside an apple computer co. house]

05:51

for a long run and you only make a one or two percent of your fee and that's it

05:55

there's no carry in a mutual fund your goal is to be the kind of fortune teller

06:00

who can make someone else a fortune mutual funds unlike hedge funds can't

06:04

short stocks mutual funds can only sell stocks and bonds when they think they're

06:09

you know headed south and mutual funds can't use stock options either they're

06:14

vanilla they can only buy and sell and well that's pretty much it so that's it

06:19

buy side versus sell side it's a friendly war on Wall Street go pick a [Man discussing buy and sell side]

06:24

seat on either side of the table and stay long enough you'll make bank...

Full Transcript