Finance Concept Base



The sections listed below are in-depth discussions of some of the major topics in finance.  This is not the stuff you find in textbooks, and some of it may contradict widely held notions.  But you just may learn something, so take a look.

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Theoretical Fundamentals

This section gives a quick overview of some of the important concepts involved in the study of finance.  It's all about "things" and contracts and personal goals.  Some of the topics mentioned here are treated separately in more detail.

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Decision Making Models

Decision making is the stuff that life is made of.  Here are some ideas about how decision making can be approached logically.

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Accounting Fundamentals

Yes, it is true, accounting can make a strong person weep and make a weak person contemplate becoming an economist.  But to be fair to the accountants, they have a tough job trying to figure out how to distill actions down into numbers.   The whole trick to understanding accounting statements is to figure out exactly what each of the accounts means in the real world.  That is what this section will help you do.

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The Nature of Risk

Risk is one of the most important concepts in finance, and it is also one of the slipperiest.  Most textbooks do not agree on the definition of risk.  This piece puts risk in perspective.

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The Basic Contracts

All investments are contracts.  While there are many different types of investments, and more are created every day, all investments are really just combinations of three basic contracts.  This section shows how they work.

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Profit and Loss Analysis

This section explains how to use a fairly simple type of graphical analysis to understand the profit or loss that can be realized from any investment.  It does not matter how complex the financial contract seems, this type of analysis will unravel its potentials.

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Time Value of Money

Moving money through time is one of the things that financial analysts do best.  These pages show just how simple it really is.

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Financial Decisions and the Reinvestment Assumption

Time value of money analysis uses mathematics.  As it happens, there is one particularly interesting little mathematical quirk that hides in the middle of the decision making process, the reinvestment assumption.  Most textbooks get this wrong, and none explain why it exists.  Those two deficiencies are corrected here.

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Bonds

Bonds and bond analysis are one of the major areas of finance.  In all honesty, bond analysis can be a bit boring because it is so easy to do.  There are, however, some clever little twists and turns that keep things interesting.

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Equity Securities

Equity securities are a bit more lively than bonds, but their analysis is also quite simple.  This section shows how these contracts work.

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Sharks and Lemmings: How the Stock Market REALLY Works

Here it is, the ANSWER.  You too can understand why some people make money and some lose.  Figure out which you want to be.

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Breakeven, Leverage, and Elasticity

Believe it or not, these three seemingly diverse topics are all just different aspects of a firm's profitability.  This section shows how they all interact.

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A General Model for Valuing Equity Securities

This is an exercise in mathematics.  The Gordon-Shapiro dividend discount model for pricing stock is in virtually every investments and principles textbook.  The model is derived under certain boundary conditions, and the result is neat and simple.  This paper relaxes the boundary conditions and starts from first principles.  It is shown that the Gordon-Shapiro model is actually a special case of this general model.  You need to know a little calculus to get through this one.

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Market Option Pricing

This is a series of three papers that present a different approach to option pricing and even the analysis of the data.  This is not Black-Scholes or anything like it.  It is an entirely new attack on this classic problem, and the results are really quite good.  If you do not have an open mind, stay away.  Here there be Tygers.

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