The Street

"I never knew how poor I was until I started making a little money."
- Bud Fox


What I most like about my Financial Management course is the macro-level perspective Professor Moffet provides in his lectures. Instead of reviewing the inner workings of how to calculate the cost of equity over and over again, he focuses on how to use financial information in the larger context of business.

In class, he played a couple of movie clips, one from "Other People's Money" starring Danny DeVito and another classic movie from 1956 called "Solid Gold Cadillac." The other night I was at Blockbuster hoping to rent "Other People's Money", but it turned out they didn't even carry it. So, I perused the shelves to see what other movies had some elements of finance. I was very happy with the selection I made - "Wall Street."

I couldn't believe how effective Charlie Sheen was for being so young - he was only 21 or 22 when he made the movie! The movie has many memorable quotes, mainly from the star of the movie, Gordon Gekko, the power and greed-hungry corporate raider (similar to Danny DeVito aka "Larry the Liquidator" in "Other People's Money"). However, the line that most struck me was the one stated at the top of this post. It's sort of a take on Socrates quote, "The more I learn, the more I learn how little I know."

The most important financial concept I'll take away from this movie is the understanding of what the term "cost to trade" means. There are actually three aspects of this concept: brokerage fees, the bid-ask spread and market-impact costs. Their book definitions are a little bit much to get into right now, but basically they go as follows:

• brokerage fee - the fees paid to a broker to execute a trade
• bid-ask spread - the money a specialist or market-maker makes on the two prices quoted (e.g., 100 - 1001/8) (buy and sell)
  
• market-impact costs - a specialist bears risk when buying shares because s/he may not know if the trader is selling stock b/c of a insider information, so to hedge agains the risk, the specialist may create a bigger spread thereby increasing the bid-ask price.
  

Well it's late and I'd better get some zzzz's so I can study some finance tomorrow....