1. Finance and Investment Workshop
Student actuaries at Michigan
April 2018

2. Motivation
Dutch East India Company – World’s First Stock Company

3. Motivation (cont.)
How do we raise the funds needed to run our company?
Ships and sailors are expensive
We could just borrow all the money we need, but…
How do we diversify the risk associated with this company?
If a ship sinks, that could ruin a single investor/lender
How should our company be governed?
Since we will have many investors, who will be in charge?
The solution? A new business model—joint stock companies

4. Starting our Public Company
Let’s split our company up into small pieces that anybody can buy
These are called “shares”, which are available for anybody to buy
We are now a public company, not a private partnership
We are now subject to additional government rules
Stock certificate for Cape of Good Hope Diamond Company, 1881

5. Starting our Public Company
Let’s split our company up into small pieces that anybody can buy
These are called “shares”, which are available for anybody to buy
We are now a public company, not a private partnership
We are now subject to additional government rules
Stock certificate for Cape of Good Hope Diamond Company, 1881

6. Starting our Public Company
We need $10,000,000 to buy our first couple of ships
The Bank of Natarajan will loan us $5mil, so let’s worry about getting the rest
Debt Financing
Let’s sell 5,000,000 shares at $1 apiece to the public
IPO = Initial Public Offering
Equity Financing
Equity = the value of your ownership in something
Ex: I own 5 shares, then I have $5 of equity

7. Diversifying Risk The shareholders are the owners of the company
Ex: I own 1 million shares, I own 20% of the company
Sink or swim all together
What about the Bank of Natarajan?
They gave our company a loan, they did not buy shares
They are NOT owners in the company
The company must pay back its debts as indicated in the loan agreement
If we cannot, we will have to go bankrupt

8. Diversifying Risk 500,000−250,000−100,000−100,000=50,000
Let’s say we made $500,000 in our first six months
500,000−250,000−100,000−100,000=50,000
Earnings
Labor
50,000 5,000,000 =$0.01
Interest to Natarajan Bank
Dividend (per share)
Taxes
Number of shares
Net Income
Our shareholders will get $0.01 per share

9. Corporate Governance It’s a democracy! (Kinda) 1 Share = 1 Vote
Board of Directors more directly oversee company
They are influential shareholders
The CEO answers directly to them

10. Advantages of Being Public
“Easy” to raise capital by selling more shares
Capital = money needed to run our business (buy ships)
Risk is well-diversified among the shareholders
“Easy” to transfer ownership by trading shares
Disadvantages: what if shareholder interests and customer interests are not aligned?
Is being for-profit necessarily good for society?
Ex: Health insurance companies

11. Insurance Companies
Public, For Profit
Nonprofit

12. Other Types of Organization
Mutual Company
Customers/Policyholders are the owners of the company
Dividends go to them (Nabil’s actuarial internship!)
Private Partnership
Experienced, senior workers in the firm are the owners
Ex: Law firms, senior lawyers are partners
Ex: Consulting, senior consultants are partners
Type of business will affect what organization is appropriate

13. Stock Trading You can easily trade your shares on stock exchanges
NASDAQ, NYSE
Price of Stock
Theoretical: PV of Expected Future Dividends
Practical: Supply and Demand
“Buy low, sell high”
Investing vs. Gambling
Looking for consistent returns, or to get rich quick?

14. Stock Trading Let’s look at a stock and some associated info
Ticker = F
Stock Exchange = NYSE
Open = Price at start of day
High = High price for the day
Low = Low price for the day
Mkt Cap = Value of all shares combined
P/E Ratio = Price divided by Earnings Per Share
Dividend Yield = Annual dividend as a percentage of stock price

15. Stock Picking—Junk Science?
Cat vs. Professional Stock Pickers
Well-respected fund managers
Cat
Illustrates the “random walk”—in the short term, individual stocks are volatile

16. Nabil’s 3 Rules of Investing
Don’t put all your eggs in one basket
Use index funds, ex: SPY
Don’t try and get rich quick
Don’t invest in what you don’t know, do your due diligence
Do invest early and patiently
It will pay off when you’re older

17. Index Funds Seek to match the returns of a stock index
Index = summarizes the returns of some collection of stocks
Individual stocks are volatile, but collections of stocks reduce variance of return
Ticker: SPY
Mirrors S&P 500 Index
80% return the last 5 years
14% over the last year

18. Getting Started w/ Investing
Read the news, keep up with economic developments
Wall Street Journal, New York Times, etc.
Practice buying and selling stocks in simulations
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When you’re ready, open a brokerage account
Robinhood—trading app, 0% commission per trade

19. Questions? Finance and Investment are the focuses of…
MATH 423
FIN 302
Exam IFM
Anything else?
Cryptocurrency?
Options Trading?