Help me understand economics!
October 29, 2010 10:32 PM   Subscribe

I was watching The Social Network yesterday when I realised that I don't know a thing about how economics work. What is stock dilution? What's a subprime? What are they selling in the stock market? Where can I find a simple, for-dummies guide to understanding modern economics?

Sites and books both accepted, only requirement is that they should be easy to read - I'm not too keen on reading a textbook. I want something of a good primer on everything you need to know about shares, stocks, markets, etc. etc.
posted by Senza Volto to Work & Money (18 answers total) 46 users marked this as a favorite
The first thing that comes to mind when I hear people ask questions like this is the incredibly enlightening This American Life episode The Global Pool of Money. It's truly great.
posted by ejfox at 10:35 PM on October 29, 2010 [2 favorites]

That's not economics, that's finance.
posted by pompomtom at 10:43 PM on October 29, 2010 [8 favorites]

Yes, economics is totally, totally a separate thing from stocks and the stock market. You're basically saying "I don't know anything about music. What is choreography?"
posted by 3FLryan at 10:47 PM on October 29, 2010 [4 favorites]

To drive home the point further, so you can decide what you really want to ask about:

I majored in economics in college and not once in any class did we study stocks, the stock market, or shares. In fact, a few of my professors from intro Econ courses would specifically say at the beginning of the semester "if you want to know about stocks or how to make money leave the class now".

As a starting point, I would suggest looking up the definition of economics as a discipline, and then maybe the definition of finance. From there you can go with what interests you, but it sounds like you want to know about finance.
posted by 3FLryan at 11:04 PM on October 29, 2010

See, that's how nooby I am about this whole thing!
posted by Senza Volto at 11:10 PM on October 29, 2010 [3 favorites]

In the specific context of The Social Network, you might find a little background reading on tech startup finance and corporate governance -- angel funding, VC rounds, burn rate, etc. -- most useful.

It really doesn't have much to do with economics, but will explain a lot about the difference between a multibillion-dollar business and barely-remembered internet roadkill. Something like Jerry Kaplan's Startup: A Silicon Valley Adventure (memoir) or even Po Bronson's The First $20 Million Is Always the Hardest (fiction) might actually be useful here, along with other startup memoirs that might refer to the original dot-com boom (or earlier) but invoke the same structures and processes that exist today.
posted by holgate at 11:25 PM on October 29, 2010

Wikipedia is a noob's best friend.

but it helps to know, at least, what questions to ask (which searches to pursue).
posted by philip-random at 11:43 PM on October 29, 2010 [2 favorites]

Start listening to the Planet Money podcast and following their blog. It covers both finance AND economics. It's made by the same people who did the afore-mentioned Giant Pool of Money episode of TAL.
posted by KingEdRa at 12:25 AM on October 30, 2010

This ought to get you up to speed in a relatively painless manner (there's got to be a little pain for great gain, eh?) This material should give you a fairly broad background in both finance and economics; you can either identify additional resources / directions to continue your self education, or stop here. I'd also suggest you begin reading the financial news, either online or in print, as often as possible.

And after all of this if you're interested in going deeper I've got a number of resources in my profile that will help you become what I call A Student of the Markets; be warned though - this is not only a life long goal, it may also become an obsession.

Don't hesitate to MeMail if I can provide further information.

Hope this helps!
posted by Mutant at 1:09 AM on October 30, 2010 [32 favorites]

I don't know how you'd start. But I think Niall Ferguson's book, The Ascent of Money, is gripping and informative. On the other hand, you might find its biases off-putting. I didn't, largely because I was sympathetic to them. If you are looking for an organic, evolutionary view of how we got here (how financial markets originated, grew, and put us in the situation we are in today), it's great. It explains fundamental financial processes -- although it doesn't really account for the current financial crisis we're in today, largely because it was published about 3 years ago.
posted by Mr. Justice at 6:27 AM on October 30, 2010

There's a book called "Inside Out" by Dennis Levine which chronicles Levine's very illegal manoeverings in the 1980's along with Michael Milkin and Ivan Boesky. I found the book very interesting for a few reasons, including the way it simply and clearly explained how the stock market worked, and share splitting, and white knights, and golden parachutes, and buying on margins and all those terms that I had heard, but did not understand. Read it for the great story, and as a primer for that kind of info.
posted by ThatCanadianGirl at 7:05 AM on October 30, 2010

I'd recommend you start listening to Planet Money podcast from NPR. SO GOOD. The episodes are about 15 minutes, twice a week, and told specifically to educate the non-experts on the current issues of the day. You'll learn a ton from it. Best part is that it's entertaining too!
posted by kryptonik at 7:55 AM on October 30, 2010

One incredible resource Mutant didn't mention, perhaps out of modesty, is Mutant. Check out his profile and posting history for an astonishing wealth of information about financial markets and much more.
posted by AkzidenzGrotesk at 9:23 AM on October 30, 2010

Whoops, he did actually say "check my profile." Heed him!
posted by AkzidenzGrotesk at 9:26 AM on October 30, 2010

I'm not sure I agree that economics and finance are as different as people here say. Economics is the science of studying supply and demand of goods and services and money, finance is the science of managing money. They intersect in a lot of places.

For stocks, read Jim Cramer's "Confessions of a street addict". Good book and teaches a lot about how stocks work and how people in finance work.

Very simply:

What are they selling in the stock market? A stock is a piece of ownership in a company. You are given stock in return for investing money, time or ideas into a company. You can then buy and sell these shares of ownership on the open market. So what they are buying and selling is pieces of companies. The price fluctuates based on the instantaneous supply and demand for ownership of that company.

Companies use stock to generate cash for themselves. Suppose a company has all of its shares of ownership sold to investors for $100 a piece. Then the price of their stock drops to $50 because people don't really want to own that stock for some reason. The company will buy up some of that stock at $50, hang onto it and sell it back when the market goes back higher and generate cash.

What is stock dilution? That is when a company creates more stock that didn't exist before. If there are 100 shares outstanding that represents 100% ownership in the company, the company issues 100 brand new pieces of stock so that those original shares are worth half what they were before. (It is more complicated than that, but that's the basics of it.)

What's a subprime? Just like there is a market for stock, there is a market for debt. The price of debt (or the interest rate) depends on tons of things, but the main factor in the price of debt is the risk to the person loaning the money. The bigger the chance there is I won't get my money back, the more I am going to charge you to borrow it. But if I charge too much, someone else might loan you the money instead and I don't make any money. That all settles out to where there is a lowest rate that a certain type of debt will sell for at that moment. That is the prime rate.

Someone who has good credit will get the prime rate (for that kind of debt). Someone who has less than good credit will get a rate that isn't as good. That is a subprime loan.

Assuming you are talking about mortgages, the reason subprimes were vilified is that people were selling them to people that actually qualified for good rates, but weren't savvy enough to shop for those rates. Which is a form of fraud/usury. Or, they were selling subprime loans to people who had no chance of paying back the loan in the long term. But they were representing these borrowers "up the chain" as people who weren't as risky as they really were, just so they could take the commission and run.

When everyone is on the same playing field, subprime loans are good things, necessary tools in the world of finance. If my credit sucks, but I KNOW I am going to profit from a deal and need cash, I will trade away some of that profit so I can make the deal. When i pay back that loan, my credit rating goes up because I now have a good transaction in my history.
posted by gjc at 9:50 AM on October 30, 2010

I took an accounting class in college. Even though it didn't cover stuff like "what is a subprime loan," it did cover stuff like "what is a balance sheet" and "why do companies sell stock" which is incredibly useful for understanding the news these days. Unlike finance classes, accounting classes don't require tons of math background and are taught for cheap at community colleges.
posted by miyabo at 9:59 AM on October 30, 2010

On the finance side of things, check out Andrew Tobias's book The Only Investment Guide You'll Ever Need. A good overview written in a very readable style.
posted by Fuzzy Monster at 12:26 PM on October 30, 2010

Khan Academy has some very good lectures on finance and economics.
posted by Carius at 5:46 AM on October 31, 2010 [2 favorites]

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