Today, Xiao Feng wants to stand from the perspective of a practitioner and hopes to explain the nature of finance in a simple and understandable way from five aspects. In other words, he will divide finance into five generations, from easy to difficult, deepening layer by layer.

Let's start with the first generation of finance. First, let's go back to the simplest model. Suppose hundreds of years ago, there was no financial system or financial institutions, and Xiao Feng was a poor man.

However, I am particularly good at making bread, so I want to open a Xiao Feng Bread Shop. But I lack the initial capital. At this time, I thought of the neighbor, Old Zhao, who has some private money hidden and is a wealthy man.

So I went to Old Zhao and said, "Brother Zhao, I want to open a bread shop. Can you lend me 100 yuan? The business will definitely be very good. After I make a profit, I will return you 110 yuan with the principal and interest."

Then Old Zhao began to consider it. Anyway, these money is just lying under the bed, and it can't hatch an egg. It's better to lend it out, and by the end of the year, there will be an extra 10 yuan. So let's lend it to Xiao Feng.

So the money flowed from under Old Zhao's bed to Xiao Feng's pocket, becoming the initial capital of the milk tea shop.

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This is actually the simplest first generation of finance. Don't look down on it because it is so simple, in fact, it has already summarized the essence of finance. Finance is money, and finance is the integration and circulation.Finance is about making money flow, directing it to places where it can create the most value. Take the previous example: Old Zhao lent Xiao Feng 100 yuan. For Old Zhao, he could earn an additional 10 yuan in interest, and for Xiao Feng, it allowed him to open a bakery. For the general public, they could enjoy delicious bread.

Although the 100 yuan under Old Zhao's bed might seem like a trivial matter, it can improve everyone's life. In professional terms, this is called increasing the overall welfare of society.

It also improves the efficiency of resource allocation. Now, let's move on to the introduction of the second generation of finance. Xiao Feng continues to run his bakery, and after careful management, the business is doing better and better.

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Finance Generation 2

At this point, I wanted to open a branch, but to do so, I needed more money. The problem arose because Old Zhao's bed was already empty; he had lent me all his money, and I didn't know that many Old Zhaos.

Similarly, Zhang San's fried dough shop, Li Si's melon seed factory, and Wang Wu's restaurant all needed money, and they also didn't have enough resources to find their own Old Zhao. So, what should they do?

This is when an intermediary institution is needed, and that's when banks came into being. This is the second generation of finance. Compared to the first generation, it has an additional middleman, which is the bank. The role of the bank is very significant.Firstly, banks can pool all the "Old Zhaos," and all the "Old Zhaos" can deposit their money into banks. At the same time, all those who want to do business like Xiao Feng can borrow money from banks.

Banks can help money flow better here, help resources be better allocated, and they can also earn a spread in the middle, everyone takes their own benefits, and the result is that everyone becomes better.

So now, the development of banks is very mature, to the point where everyone thinks this is a very normal thing, now only a fool would hide money under the bed, definitely put it in the bank to earn interest.

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Financial Generation Three

Next, let's take a look at the third generation of financial versions. Xiao Feng, I still continue to open my own bakery, but I always go to the bank to borrow money bit by bit, there is such a problem, no matter how much money my bakery makes later, the interest I pay is fixed.

Then low interest means it is low risk, so in other words, if my project is particularly high risk, the bank will not lend me money because it is afraid I can't pay it back.

For example, one day Xiao Feng wants to develop a zero-sugar, zero-fat, zero-calorie quantum slimming bread, and that is a big risk because everyone doesn't know if this thing can sell well?

It may be a new type of product with huge potential in the future, quickly occupying the market, or it may be launched and everyone thinks you are a liar, and then no one buys it, and it's over.The risk for this project is quite high. If I go to the bank, they will definitely be unwilling to lend me money. So what should I do at this time? I need to find a way to find those who are willing to take risks and hope to get higher returns.

So I went around and found an investor, let's call him Old Zhang for now.

Then I said to Old Zhang, "Look, my project is so good. Why don't you join us? Although there are risks, it has a promising future. If we make money, we will share it 50-50. We will prosper together and suffer together."

So Old Zhang saw that I, Xiao Feng, was quite reliable, and the bakery business was also doing well. After careful consideration, he finally decided to take the money out of the bank and invest it in Xiao Feng.

This is the third generation of financial models, which has this form of partnership, in other words, this hope to get high returns.

At the same time, the money of those who can bear high risks can flow to those high-risk, high-return projects. The professional term is equity investment. The one who contributes the money, Old Zhang, is called an investor.

The most famous example we have heard is in Silicon Valley, there is a big shot named Peter Thiel. In 2004, he spent 500,000 US dollars to buy 10.2% of Facebook's shares.

By 2012, he sold it for 1 billion US dollars. In 8 years, it increased by 2,000 times. But if he had put the money in the bank, it wouldn't even double in 8 years. This is a model of equity investment.Financial Generation Four

After introducing the first three parts, we now come to the fourth generation of finance, where Xiao Feng continues to run his bakery. At this stage, the business is becoming more and more popular, the business is growing larger, and more branches are being opened. As a result, the places that need money are also increasing.

But at this time, I can't find so many Lao Zhangs to make equity investments for me, so what should I do?

So, the middleman appeared again. This middleman is what we usually call investment banks, securities firms, or FAs, and they all do this kind of thing.

In fact, they are going to help you find this Lao Zhang. In this version of financial generation four, these investment banks spend all day in this circle, and they naturally have a lot more resources of investors than entrepreneurs like me, Xiao Feng.

These investment banks or securities firms also know how to package the project and let the big guys invest. Just like some people who don't know how to draw PPT when making products, the investment bank will say, "It's okay, I'll do it. As long as you give me money, I can handle all of this and even help you attract Lao Zhang."

So, with the investment banks and securities firms, more Lao Zhangs and Xiao Fengs can be connected, allowing for better allocation of resources. However, it is worth noting that there is a significant difference between investment banks here and the banks we mentioned in the second generation of finance.The bank lent money to Xiaofeng on its own, earning a spread in the process, so it bears the risk itself.

However, the investment bank is very shrewd in this regard. To put it bluntly, it provides a service, connects those in need of funds with investors, and collects a service fee in the middle. After that, it's up to the two parties themselves.

Financial Generation Five

The above is the fourth generation model. Now, let's talk about the final version of the financial generation five. At this time, Xiaofeng's business is extremely successful, and the bakery is thriving. Many ordinary people also want to invest in my bakery.

At the same time, Xiaofeng does indeed need this money. This is the version of the financial generation five, where the shares of Xiaofeng's bakery can be publicly issued to the general public, allowing scattered retail investors to participate and become shareholders of Xiaofeng's bakery.

This is what we often hear about going public, IPO. So places like the New York Stock Exchange, Hong Kong Stock Exchange, and Shanghai Stock Exchange are all doing this.

Of course, there is usually an intermediary investment bank involved in this process, as mentioned in the financial generation four. To put it bluntly, it continues to provide services for you, but this time it's not about finding someone to borrow money separately, but helping you go public.

So, in the version of the fifth generation, everyone's idle money can basically be invested in different channels according to the level of risk, and obtain corresponding returns.At the same time, these projects with varying degrees of risk can also secure their own funds through various channels.

Extension

In reality, life is much more complex, with countless Xiao Fengs, Lao Zhaos, Lao Zhangs, and countless intermediaries, all interwoven and connected in the middle, making you feel that the entire financial system is particularly huge.

However, to put it bluntly and trace back to the source, it is actually what we just said. Let's sort it out a bit, and we will know that there are mainly three roles. One is the fundraiser, like Xiao Feng, who needs money and needs to start a company and carry out business.

The second category is the intermediary, who can help you sort things out in the middle.

The third category is the investor, whether it is equity investment or debt investment, Lao Zhao and Lao Zhang are actually doing this.

Of course, in reality, the Xiao Feng and Lao Zhao we mentioned are not just individuals, but can also refer to an institution or a company. Moreover, a company may engage in many businesses, and when the forest is large, there are all kinds of birds, and when the company is large, it does all kinds of businesses.

Let's sort out how these roles operate in real life. For example, if we ordinary people have some spare money, if we put it in the bank, we are already contributing to the development of the financial system at this time.Because everyone has injected capital into this financial system, you become a creditor investor. Of course, if you buy a company's stock, then you are an equity investor.

Some people say, as an equity investor myself, I am not professional, how do I know whether to buy Xiaofeng's bakery, Xiaoli's milk tea shop, or Lao Zhao's steamed bun shop? What should I do?

At this time, another role emerges, which is the fund. The fund is actually a very general concept, to put it bluntly, it will collect a lot of people's money and then invest in specific products according to some specific needs.

Like the private equity funds, venture capital funds, pension funds, hedge funds, and so on, that everyone usually hears about are all funds. So why does it sound very complicated?

Another reason that may occur is that you invest your money into Fund A, then A invests in Fund B, B invests in Fund C, and C finally invests in a project, so it is wrapped layer by layer, making it very complicated.

Assuming it finally invests in Xiaofeng's bakery, then the money earned by Xiaofeng's bakery in the end will be divided layer by layer.

But you should not think that the word "skinning" is a derogatory term.

Every link in this process obtains the corresponding income according to the risk it bears, which is another method of more rational and effective allocation of resources.Then let's talk about this intermediary investment bank, which is what we usually hear about as Goldman Sachs, Morgan Stanley, J.P. Morgan, CICC, CITIC, etc. These are the most typical intermediaries. They can help you issue shares, they can help you issue bonds, and they can also help you go public.

As long as you have the needs of the capital market, they will strive to help you complete it, and then they earn an intermediary fee in the middle.

In addition to helping you issue shares, bonds, and go public, the investment bank can also continue to provide you with services in the circulation market after the bonds and stocks we just mentioned have been issued.

For example, if you want to buy some special products, derivatives, they can all sell to you, providing you with market liquidity. This kind of post-issuance transaction is also what we often talk about as secondary market transactions.

This is also why some people often call investment banks sellers, what do they sell? They sell services, so they are a service provider.

There are also many that mess up our knowledge system, such as those big companies like Alibaba, ByteDance, Tencent.

In fact, their own business is the most typical, which is what we call the company side that needs financing, but now they are getting bigger and bigger, and they have more and more money, so they all have their own investment departments.

These investment departments play the role of investment in the market, just like Alibaba, Ant Financial, which also play the role of intermediaries, which is basically a full package.So in the final analysis, finance is about allocating money more reasonably.