A very brief introduction to (some) finance

This is not meant to be a comprehensive course about finance, but just highlight some bits of information that may help in understanding what happens with your money in the bank. We try to keep the vocabulary simple, in part because we're not finance professionals!

The focus of these pages is on corporate finance via publicly traded instruments. Basically money that is publicly reported.

Also, none of this is, can nor should be understood as financial advice. We merely aim to provide some educational resources. If you spot something incorrect, feel free to let us know, we'll all be better for it!

What happens with your money

When you put your money in the bank, say in a savings account, the money does not just sit in a vault behind a heavy armored door, waiting to be robbed by gangsters.

Your bank will take that money (most of it) and invest it in various ways. Keeping to the basics, they can: - buy shares in companies, - lend it to other banks, or people, companies, cities, governments, etc..., - or do some really complicated stuff with it, that are mostly beyond the scope of this little site.

We are going to focus on the first two options, buying shares and lending. Bankers usually talk about "equity" and "debt" instead.

Buying shares (equity) in companies

This is what people talk about when they say they bought shares or stock in Apple. A share in a company is a (virtual) piece of paper saying you own a small part of that company. You're now a shareholder.

This comes with some perks: - because you own a small piece of it, you are entitled to receive a small piece of its profit. This is called "dividends". Companies typically distribute these once a year, after their AGM (they meeting of all shareholders). - you have a say in the company. At the annual shareholder meeting, the company's management asks a few questions on which shareholders are can vote. These are typically high-level questions about policies, etc...

The value of the share can go up or down (this is what you see in the news), and most of the time, you can buy or sell these share at almost any time. If you sell at a higher price than what you bought, you make a profit, if not, you lose some money. Simple!

With shares, you can make money in two ways: - with dividends once a year, - when reselling the share if its price went up since you bought.

The risk with shares is that the price can go down, or the company can make a low profit, which would mean low dividends. These two things are what the divestment movement uses.

Lending money to companies (debt)

Just like you might need to borrow money to buy something expensive, say a new car, companies often need to invest to keep their business going. For instance, a company might need to build a new factory to expand their production. Often they will borrow money to pay for this. And like when you buy a car, they will go to a bank, sometimes several banks at the same time for very expensive stuff (say a new airport, or a pipeline...) to borrow that money.

After they borrow the money, they start repaying on a regular schedule, with interest.

The loan can have various fancy names, like "debt instrument" or "corporate bond".

A country or a city can also borrow money, in which case it's typically called "government bond" or "municipal bond".

When you lend money to a company, you don't own a piece of it, but it has a debt to you, it owes you money. You make money because it pays interest, say 5% per year (bankers call this the "coupon"), and at the end of the loan period (the "maturity", say 4 years), the company has repaid the entire loan.

The risk is that the company could go bankrupt before it has repaid the entire loan, in which case you don't get back the part it hasn't repaid yet.

Funds

The two components above are more or less the basic bricks of finance (at least, the part we're interested in here). With these, you can build a lot of financial instruments (something you can buy and sell).

The third item we're interested in are "funds". A fund is more or less a basket of several instruments.

Often the fund itself functions as some sort of company, in which you can take equity, meaning you can buys shares of the fund. The fund company makes money on the investments it holds, and gives you a share of the profit in return for investing in it.

A fund could contain: - equity, ie. shares in one or multiple companies, - debt, ie. loans to companies or public entities, - monetary instruments (we won't say much about them, the idea is to make money by exchanging currencies, for instance dollars and euros), - other funds.

Most funds will have some "orientation", focusing heavily on equity for instance, or government debt, or mixing everything together.

The details of what each fund contains should be publicly reported at regular intervals (this depends a lot on the regulation of the country where the fund is based). This "list of ingredients" (called "holdings") of funds is a big part of the data we collect and share at OpenFinData.