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Current time:0:00Total duration:4:02

Video transcript

let's say Pete over here thinks that he's a pretty good investor so what he does is or he has an idea that says look I'm going to create a corporation and I'm going to get a bunch of people to contribute money to that corporation and then I'll manage that money and maybe I'll take a little fee for myself so that I can maybe hire some analysts or get some computers or some get some office space so what he does is he sets up a corporation let's say he sets up a corporation right over here and let's say the way with the way he first sets up the corporation let's say it just has four shares and I'm making the number really small just to make the drawing in the math easy this wouldn't be realistic normally it would be something in the hundreds or thousands of shares or maybe even more than that but let's say it has four shares and let's say all of the four shares are owned by Pete initially just to simplify the explanation and he puts in $400 $400 into this corporation so another way to think about it in exchange for him putting $400 into this corporation he gets four shares or each share each share is worth is worth $100 each of these shares right over here and so what he does is he registers this corporation and I'm talking about a US specific case but there's similar types of organizations in other countries he registers this organization right over here with the US SEC Securities and Exchange Commission and he also registers himself with the SEC or even better he registers a management company that he runs with the SEC so let's call it Pete Pete Inc is a corporation he starts off that he also registers with the SEC and when he registers with the SEC he tells them that look this company right over here we're going to issue more shares for more people to contribute money and I'm going to manage this money right over here and I'm just going to take a percentage of the total assets under management sometimes you'll see AUM use that just means assets under management that will go to Pete Inc every year for figuring out the best place to invest this money and it's usually on the order of about one percent sometimes a little bit less sometimes a little bit more so one percent per year so right now with only $400 assets for hundred dollars under management it would only be about $4 per year but since he registered with the SEC he can call himself a mutual fund and he can solicit funds from the public so it is a mutual fund he has met he's jumped through all the hoops that the SEC sets up for him so he can market he can market himself as some type of great fund manager we don't know if that's true or not and he can also solicit funds from the public so from from the public and we're going to see in future videos there are other funds especially hedge funds that can't just that one they can't market and they can't take funds from the public those can only take funds from certain types of sophisticated investors and what happens in Pete's fund and this is going to be an open-ended mutual fund that we're showing here and most mutual funds are like that let's say that Sal comes along he likes Pete's marketing materials I said hey I want to I want Pete to manage my money too so Sal goes and he gives $100 and he and says Pete give me a share so Pete creates another share right over here he creates another share he gives it to Sal so he gets one share that's me I get one share and then exchange I gave $100 to the fund so now the fund has the fund has $500 so this is another hundred dollars right over here and now Pete's annual fee is going to be one percent of this whole thing or five dollars a year and if this whole thing grows let's say this whole thing doubles to from $500 let's see it doubles to $1,000 then that thousand dollars is essentially split amongst these five shares now so all of the people will essentially have their money doubled - whatever Pete's expenses are in the next few videos I'll go over a little bit more of the mechanics of an open-ended mutual fund