Understand economics from scratch

Chapter 31 Why You Don’t Manage Your Money—Practical Finance You Must Know (3)
In such a situation, the bank spends a lot of money to persuade people to buy land. The interest rate is almost zero, but the land price keeps rising.If you buy land with a loan, you will definitely make a lot of money due to the appreciation of the land.In addition to real estate, ordinary people also put their bank deposits into the stock market one after another.The price-earnings ratio of the Japanese stock market was as high as 80 times (the price-earnings ratio of the United States, the United Kingdom, and Hong Kong was only 25 to 30 times).In the myths of "the city will not fail" and "the stock market will not fail", the whole country of Japan is jubilant.

However, the characteristic of a bubble economy is that it is bound to burst suddenly.The prices of Japanese real estate and stocks have far exceeded their actual value, and people's buying and selling have become pure speculation and hype.From the first day of market trading in 1990, the Nikkei stock price fell into hell rapidly, and the speed of its decline was jaw-dropping. Subsequently, the Japanese stock market fell into a bear market for more than 10 years.Before the bubble economy, a house purchased for 5 million yen suddenly dropped to 1990 million yen in the mid-1s, depreciating by 80%.Despite this, a large number of land and houses are still not sold at all, and the completed houses are empty and unoccupied.

The bursting of Japan's "bubble" economy has brought serious sequelae. Stock prices and land prices have fallen sharply, the real estate industry has been depressed, the stock market has been in a downturn for a long time, non-performing debts such as interest and debts have increased significantly, and companies' enthusiasm for investing in risky industries has declined.The drop in stock prices has directly hurt ordinary small and medium-sized enterprises and the majority of families.After the largest bubble in the history of human economy burst, Japan has been paying off its debts for 15 years: economic depression, political turmoil, and rising crime rate.Take the JR Chuo Line of the Tokyo Metro as an example. After the bubble burst, it once became a popular place for bankrupts to commit suicide. Therefore, all Tokyo subways had to install screen doors to prevent it.Until now, the Japanese economy is still in the recovery period.

In addition, there are many cases of bubble economy.In the United States, the reason why the financial crisis is serious is that the credit overdraft in the United States is much more serious. Its financial turmoil started with the subprime loans of real estate, that is, allowing consumers to take out loans to buy houses, and then use the loans as collateral for secondary loans. loan.It is already a debt, and the debt can be used as an asset for collateral. Such a serious credit overdraft will cause problems sooner or later.It is not that the United States is ignorant of this situation, but for a long time, the United States has not had any problems with its credit. This habitual illusion made the United States inflate the financial bubble until it finally burst.

In fact, the reason for the financial bubble is simple to say, it is caused by the lack of risk control. This is the case in a country, and the same is true in personal investment. If you borrow money to invest, it does not matter whether the investment can be recovered in the future. It is just a good thing for the future. In this case, the risk of your investment must be in vain is relatively high.There are many enterprises relying on borrowed money to operate by defaulting on other people's accounts. Although they are very prosperous on the surface, this is only a superficial prosperity. Once there is a problem in a certain link, the enterprise may go bankrupt.Some families have no risk control on the investment funds. On the surface, they seem to be very rich and have invested in a lot of projects. They usually spend a lot of money and have no financial preparations in advance. For example, someone in the family is sick or undergoing surgery , could bankrupt a family.

Flashy, will not last long.Throughout the ages, any over-prosperous society often hides a deep crisis.The same is true of the bubble economy.In modern society, under the background of economic globalization, real estate bubbles and stock bubbles are more harmful and spread more widely, forcing all countries to attach great importance to them and vigorously prevent them.

Financial Leverage: What Can Make You Rich Overnight

In ancient Egypt, people used levers to lift heavy objects around 1500 BC, but people didn't know the theory at the time.Later, Archimedes devoted himself to studying this phenomenon and discovered the principle of leverage.

After Archimedes discovered the principle of leverage, he once said such grandiose words: "Give me a suitable fulcrum and a long enough lever, and I can move the earth."

In our daily life, the principle of leverage is widely used.For example, the steering wheel you drive every day uses the principle of leverage.High leverage is an important feature of financial transactions in today's capital markets.The so-called leverage ratio refers to the multiple of the assets of a financial institution to its own capital.For example, if the leverage ratio is 10, the bank will be able to lend $1 for $10 in capital.For a given capital, the higher the leverage ratio, the more assets a financial institution can operate, and the higher the financial institution's profitability.Financial institutions such as commercial banks and investment banks have adopted a leveraged business model, that is, the scale of assets of financial institutions is much higher than the scale of their own capital.Risk and return are directly proportional, the higher the leverage ratio, the greater the risk.The simplest example of the leverage ratio we have come into contact with is the housing mortgage loan.

So what is financial leverage? From Western financial management to my country's current understanding of financial leverage in accounting circles, there are generally the following views:

First, financial leverage is defined as "the use of debt financing by a firm when making capital structure decisions."Therefore, financial leverage can also be called financing leverage, capital leverage or debt management.This definition emphasizes that financial leverage is the use of liabilities.

Second, think that financial leverage refers to appropriate borrowing in financing, and adjusting the capital structure to bring additional benefits to the enterprise.If debt management makes the company's profit per share increase, it is called positive financial leverage; if it makes the company's profit per share decrease, it is usually called negative financial leverage.Obviously, in this definition, financial leverage emphasizes the result of debt management.

In addition, some economists believe that financial leverage refers to the significant impact on corporate sovereign capital earnings due to the use of debt funds with fixed interest rates in the total funds of the enterprise.Compared with the second point of view, this definition also focuses on the results of debt management, but it limits the object of debt management to debt funds with fixed interest rates, and the scope of the defined object is narrow.In fact, enterprises can choose a part of debt funds with floating interest rates, so as to achieve the purpose of transferring financial risks.

The vast majority of people who invest in real estate do not pay off their home purchases in one lump sum, and they are all debt investments.If you buy a house of 100 million yuan and the down payment is 20%, you have used 5 times the financial leverage.If the house price increases by 10%, your return on investment is 50%.Then if your down payment is 0%, the financial leverage becomes 10 times.If house prices rise by 10%, your return on investment is doubled!Are you happy!Wait a minute, everything has advantages and disadvantages, sugar cane is not sweet at both ends, and financial leverage is no exception.Financial leverage can magnify returns, but it can also magnify losses.Also take the 1 million yuan house as an example, if the house price drops by 100%, then the loss of 10 times the financial leverage is 5%, and the loss of 50 times the financial leverage means that your capital is lost, and the whole army is wiped out...Nowadays, many people in the United States The main reason for the forced auction of the house was that the multiple of the financial leverage used before was too large.

Option futures are specifically operated through a margin account, which also uses the principle of leverage.A margin account means that when buying stocks, you only need to spend 25% to 30% of the total value of the stocks.25% when "buy long" and 30% when "sell short".For example, if you put 4 yuan into a margin account, you can buy stocks with a total value of 4 yuan.In other words, there is 75 times leverage.Of course, the 25% of the money is borrowed from securities companies, and the interest rate is generally higher than that of banks and lower than that of credit cards; and your account must also maintain 30% (buy long) to [-]% (sell) of the market value of the stocks you own. short) funds.Once it is lower than that number, your agent will be impolite and will make a "margin call", asking you to quickly make up money for "blood transfusion".

Margin accounts for foreign exchange transactions generally use more than 15 times the financial leverage; hedge funds generally use 20 times the financial leverage; Times... Now you will understand why they are bankrupt when they say they are bankrupt.The margin for futures is lower than that of ordinary stocks.The margin ratio is lower, only 30% to 33% of the total price.Therefore, the profit or loss of futures can be as high as thousands of times the principal!I think that the old British bank Barings Bank (BariIagsBank) was disabled by a trader playing "Nikkei Futures Index".

Financial intermediaries: matchmaker for those with surpluses and deficits
We must be impressed by the matchmaker in "The West Chamber". The matchmaker is smart, witty, and lively.In the marriage of Cui Yingying and Zhang Sheng, she is the key figure in making this happy marriage come true.Therefore, people who are engaged in marriage introduction work in the society or who occasionally match young men and women are called "matchmaker".But did you know that there are also "matchmaker" in the financial market.

In economic life, banks, securities companies and other financial institutions match up those with surplus funds and those with shortage of funds, and in essence also play the role of matchmaker.

Inventor Puzmao has created a cheap robot that can clean houses, wash cars, mow grass, etc.It was a pity that the inventor did not have enough funds to put his invention into production.The old man Walter has a large savings, which he and his wife have saved for many years, but there is currently no place available.If we get Puzmao to cooperate with Walter, let Walter provide Puzmao with money, Puzmao's robot can be successfully developed and brought to market, we will have cleaner houses, brighter cars and more beautiful cars Lawn, economic and social welfare will also be improved.

The most basic function of financial markets (stock and bond markets) and financial intermediaries (banks, insurance companies, funds) is to enable people like Puzmaut and Walter to cooperate with each other to transfer funds from those who have less money than they earn. Those who have excess funds are transferred to those who are short of funds due to expenditures greater than income, so as to generate greater economic and social benefits.

Financial intermediation socializes the mechanisms for selecting business operators.In the era of petty commodity economy or usury, business operators are generally the direct owners of the business. In this case, the social screening function for business operators is basically out of the question.After the emergence of the monetary and banking financial mechanism, the social screening function for business operators began to strengthen, that is, it is generally difficult for people who lack professional knowledge and management experience to obtain bank loans.The activities of new financial intermediaries such as securities, securities markets, and investment banks have expanded the supervision mechanism of business operators from the single banking system to all aspects of society, greatly improved the operating mechanism of enterprises, and made the behavior and decision-making of enterprises more comprehensive. rationalization.

Financial intermediaries generally consist of banking financial intermediaries and non-bank financial intermediaries, specifically including commercial banks, securities companies, insurance companies, and information consulting service agencies.Funds are transferred from those with a surplus to those with a shortage of funds along two routes: one is that those with a surplus deposit money in a bank, and then the bank acts as an intermediary to integrate the received deposits and lend them to those with a shortage of funds.And use the fund usage fee received from those who are short of funds, that is, part of the loan interest, to pay the savings interest on the money deposited in the bank by those who have a surplus of funds.The deposit and loan spread is the bank's handling fee as an intermediary.This is a form of indirect financing.The other is that people with surplus funds directly purchase loan certificates issued by people with shortage of funds in the financial market, such as bonds and stocks.The cash-strapped can use the collected funds to put into production and pay regular interest or dividends.

Why is this flow of money from savers to spenders so important to the economy?The answer is that savers are often not the ones with favorable investment opportunities.Suppose you have saved 10000 yuan this year. However, since there is no financial market, you may neither borrow nor take out loans. You can only put the money in the bottom of the box and wait for consumption. One year has passed, if you have not spent the money, you still only have 1 yuan and you will not get interest.However, if Lenovo uses your 10000 yuan to develop new products, it will earn an additional 10000 yuan a year.If you get in touch with Coca-Cola, then you can lend 2000 yuan to Coca-Cola in the form of purchasing corporate bonds, and get an interest of 10000 yuan every year, so that both of you can benefit. One year later, your assets will not remain intact, but will generate 000 yuan. This is the so-called "money begets money".Without the financial markets, you and Coca-Cola may never have had the opportunity to work together.If there is no financial market, it will be difficult for those who do not have investment opportunities to transfer funds to those who have investment opportunities; both parties can only maintain the status quo, enterprises will not get development funds, and the economy will lose its vitality.

The existence of financial markets is not only beneficial to increase the production of enterprises, but also beneficial to individuals.For example, you are newly married, have a satisfactory career, and want to buy a house.Even though your salary is good, you have very little savings because you just started working.Without the financial markets, you just continue to live in a tiny apartment until one day you save enough money.But by then, you may have entered middle age or old age, have spent most of your life in a small apartment, and may not have such a great desire to buy a house.If there is a financial intermediary such as a bank, you can take out a loan to buy a house. Even if you have to pay some interest, you will still be very happy to have a house of your own in your youth.This way, when you have accumulated enough funds, you can repay the loan.The net result is that you are better off; and the people who borrow from you are also better off, earning an interest.

Financial intermediaries connect those who have surpluses and those who have deficits and facilitate their good deeds, thereby enabling the flow of funds to flow unimpeded.Well-functioning financial markets and financial intermediaries are critical to the efficiency and health of the economy.

Investment: Sacrificing current consumption to increase future consumption
There are three mottos in the investment world: "Don't put all your eggs in the same basket", which means risk diversification; "Don't put only one egg in a basket", that is, portfolio investment does not mean excessive diversification of money. Diversification will reduce investment returns; "put eggs in different types of baskets", so that the combination can give full play to the advantages of investment.

With the continuous development of the economy, investment and people's lives are getting closer and closer, and have become an important part of many people's lives.Therefore, it is very necessary for us to discuss the concept and connotation of investment.According to the definition in economics, investment refers to an economic activity that sacrifices or gives up the value that can be used for consumption now to obtain greater value in the future.The subject and scope of investment activities are very wide. Here we take personal investment as an example to explain investment:

If you have 1000 yuan in spare cash, you can take the whole family out on the weekend and go to the hotel to have a big meal. Everyone can have a happy weekend, or buy a high-end dress.But you can also deposit in the bank to earn interest, or buy stocks or funds, waiting for dividends or rising prices, or buy calligraphy and paintings from the antique market, waiting for appreciation, or share in small shops opened by friends to share profits.The former situation is to spend money (value) to obtain consumption and the enjoyment of the whole family; the latter situation is to give up current consumption in order to obtain more money in the future, which is investment.

To put it simply, all activities in which your principal can increase in value or earn income in the future can be called investments.Consumption and investment are relative concepts.Consumption is to enjoy now and give up future benefits, while investment is to give up current enjoyment and obtain greater benefits in the future.

The source of investment capital can be increased through frugal means, such as the savings after deducting daily consumption and other expenses from the monthly wage income, or obtained through debt, such as borrowing loans, etc., and can also use margin transactions The way is to use small to make big, and enlarge your investment amount.Theoretically, the enlargement of their investment quota is at the cost of increasing the degree of risk, and they follow the principle of "balance between risk and return", that is, the higher the return on investment, the greater the risk.Therefore, any investment is risky, but the degree is different.It can be seen that as long as it is an investment, there is an element of gambling in it, because future expectations often change with changes in reality.If the reality develops in the direction you expected, you will win the bet and get a good return on investment; if the reality does not develop in the direction you expected, you will lose the bet and suffer losses.

Specifically, the main components of personal investment include various assets bought and sold in the financial market, such as bonds, stocks, funds, foreign exchange, futures, etc., and assets bought and sold in the physical market, such as real estate, gold and silver jewelry, stamps, antiques, etc. Collection, etc., or industrial investment, such as shops, enterprises, etc.

(End of this chapter)