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Rock Your Summer Work Wardrobe

By Siyu Wu

May 18, 2017

Upon first glance, the most noticeable difference between college campuses and finance firms is what people wear – gone are the sweatshirts and jeans, replaced with full suits, blazers, heels, and more. A daunting, but often overlooked, aspect of starting a summer internship in the corporate world is making sure you have the right clothes for the job. Here are some things to keep in mind as you begin preparing your summer work wardrobe!

Figuring out workplace expectations

Before you go out and buy several full suits, first reach out to HR or a mentor to learn about their expectations for how you dress. Some firms will require business formal every day, other firms allow business causal between Memorial Day and Labor Day. You want to make sure you don’t underdress or overdress, so knowing what other people at the firm will be wearing will help make sure you start your first day strong.

What is or isn’t appropriate? There are no hard lines, but do remember that the corporate world is a bit more conservative than what many college students are used to. Err on the side of caution in terms of skirt/dress length, how tight/lowcut your clothing is, and the degree of casualness of what you wear. Some clear no-no’s for most firms include spaghetti strap tanks, jeans (unless otherwise stated), clothing with rips, sneakers, and short shorts.

Getting the basics

It may be tempting to buy statement pieces when heading into the store, but first focus on getting some of the fundamental pieces for a business wardrobe. To start off, one of the most important items is to get a fitted black blazer – this is something you can put over anything and everything to make your outfit look a bit more formal. Beyond the black blazer, some other key items include a professional black dress/skirt/pants, work-appropriate shoes, and white blouse. These are essential for days when you might have a particularly important meeting or presentation.

Aside from these business formal pieces, it might be helpful to do some outfit planning to figure out how to coordinate a few basic pieces to create several different outfits. It is challenging to wear business dress everyday while having some variance. Keep it exciting by adding a splash of color or unique accessory to every outfit – but make sure not to go overboard!

Business dress on a budget

While there are some pieces that are worth spending money on (for example, a high-quality blazer can last you a long time), it may seem preposterous to spend a hundred or more on a single pair of pants or dress. For simple blouses and other items, there may be no need to spend a lot of money, especially at the start of your career. There are some stores that offer relatively inexpensive options – TJMaxx, Marshalls, Banana Republic, Express are all great places to look. Even Forever 21 and H&M have some budget-friendly selections!

In addition, during end-of-season sales at Ann Taylor, Ralph Lauren, Loft, and other similar stores, you’re often able to find some great deals for high quality pieces.

Ultimately, it’s not necessary to spend a lot of money on creating your summer internship outfits. After getting the basics at the beginning of the summer, set aside some money from each paycheck for buying new outfits to refresh your wardrobe. And remember, it’s always worth it to spend a bit more on buying high-quality timeless pieces that can last you several years!

Siyu Wu is from Colorado and attends Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. Siyu will graduate in 2018. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.


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Behavioral Biases

By Siyu Wu

March 27, 2017

You might remember from the active versus passive investing article the efficient markets hypothesis, in which investors act rationally by incorporating all available information in determining whether to buy (or sell) a stock. But, are investors always rational? A quick look into history suggests that investors often act irrationally, making decisions grounded in emotion rather than logic and rational expectations. 

One of the explanations for irrational decision-making stems from behavioral finance: behavioral biases cause individuals to act in ways which seem illogical. In this article, we will discuss some of the behavioral biases retail and professional investors are most likely to fall prey to when making investing decisions. 

Confirmation Bias

People tend to be drawn to evidence that confirm their existing beliefs. For example, if you have bought General Motors shares with the believe that it will perform well, you are more likely to find and retain new information that confirms your existing belief that the company will do well. The dangers of this are that investors are likely to discount news arguing the opposite – in this example, the investor may miss bad news that suggests the stock should be sold. 

Herd Mentality

People tend to travel in groups – this is incredibly noticeable in the investing world. When a small group of investors begin buy (or sell) a stock, many more investors will follow suit, even if there is no rational justification why that stock should be bought (or sold). This mentality is exemplified during the creation and popping of stock bubbles. During times of uncertainty, investors will look to one another to determine how to react. As a result, the actions of one investor creates a domino effect which exacerbates the consequences of a market crash. 

Loss Aversion
Most people hate to lose – even more than they love to win. In the context of investing, an investor will react more strongly to losses than profit. Take this example of loss aversion: an investor sees a stock with strong fundamentals do poorly for some time. Even though the stock was originally selected for the right reasons, the investor may lose track of the fundamentals and make a bad sell decision, selling a strong company at the bottom and losing out on the upside. 

Mental Accounting
Mental accounting occurs when people to view money from various sources differently. For example, money from an inheritance is seen differently from money earned at a job – thus, people will choose to spend or invest money from these sources in different ways. These illogical distinctions cause investors to become overly attached to certain investments, clouding their view regarding whether the investment is a profitable decision. 

These are just four of many different behavioral biases. Each of these biases are interconnected – when one manifests, it is likely other biases are also present. How to overcome these behavioral biases? The first step is becoming aware of what biases exist. From there, investors should establish unchanging trading rules so that they don’t act rashly. In addition, learn to research a variety of sources to get diverse opinions and focus on forming your own decisions when it comes to investing. 

Siyu Wu is from Colorado and attends Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. Siyu will graduate in 2018. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.

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Active Versus Passive Investing

By Siyu Wu

March 2, 2017

The debate between active and passive investing has existed for decades, but has recently come again to the center of attention as many passive funds post high returns and evidence show capital flowing from active into passive funds. But what exactly is the difference between active and passive investing? Here, we’ll discuss a general overview of what defines active versus passive investing, and common arguments in favor of and against each investment strategy.

What is passive investing?

Passive investing, otherwise known as index investing, occurs when the investment portfolio mirrors a market index, such as S&P 500. This strategy is commonly employed by mutual funds (such as Vanguard) and Exchange Traded Funds (ETFs), though in recent years some active ETFs have been established.

The key philosophy behind passive investing is the efficient market hypothesis. Simply put, this hypothesis argues that stock prices always correctly reflect the fundamental value of a stock, incorporating and reflecting all relevant information. Under this argument, it is impossible to outperform the market in the long run. Therefore, it is more profitable to create a portfolio that mimics an index. 

What is active investing?

In contrast, active portfolio managers (such as Fidelity) choose to purchase stocks and other investments and continuously monitor the activity of these investments to take advantage of profitable conditions. These investors use financial models, fundamental research, market forecasts, and personal experiences to make decisions regarding which securities to buy, hold, and sell. Active managers watch the markets very closely – even the smallest variations in market prices can result in an opportunity to profit!

The goal of active managers is to exploit these short-term variations in the markets to produce returns better than those of passive funds that mark to an index. This is also known as “outperforming the market,” which goes against the basis of the efficient markets hypothesis discussed earlier. Active investors believe that stock prices do not always accurately incorporate all relevant information and reflect the fundamental value of that security. These price discrepancies from the fundamental price are exactly the source of return for active managers.

Passive vs active investing: the debate

The debate between passive and active investing has existed for a long time, and stems from arguments regarding the viability of the efficient markets hypothesis. Those in favor of active management argue that active investing, when done well, does indeed outperform the indices. In addition, active investors have increased flexibility in choosing which stocks to hold, can manage risks through hedging and selling stocks when risks increase, and allows for elite portfolio managers to exploit informational advantages to maximize returns.

On the other hand, in recent years, arguments for passive investing have become increasingly prevalent as empirical data suggests that active investing on average has not outperformed the market. For the typical individual investor, passive investing is advantageous in its minimal fee structure, since there is no need to pay a portfolio manager to research and select which stocks to buy. In addition, the composition of a passively-invested portfolio is very transparent – investors always know which securities are an index. Given these advantages, many argue that the after-tax and post-fee returns in passively-managed portfolios actually surpass the returns seen in active management.

With this understanding of the two broad categories of investing strategies, you can better understand which strategy better fits your personal preferences. When choosing to invest your own money, make sure to do your research before deciding what type of fund you want.

Siyu Wu is from Colorado and attends Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. Siyu will graduate in 2018. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.

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Market Trends 101: Mergers and Acquisitions, So What?

By Siyu Wu

November 4, 2016

In this new series, I will introduce a wide variety of trends in the financial markets and provide some analysis of impacts of the trend. If you’re interested in learning more about finance, are preparing for interviews and want to gain some market knowledge, or want to know what’s going on in today’s business world, these articles will provide some insight! This month, we’ll introduce mergers and acquisitions (M&A), and discuss them in the context of the agricultural industry.

What are mergers and acquisitions?

Simply put, a merger is when two companies combine to form a new company, and an acquisition is when one company buys another company. These processes take at least six months, often many more months, from start to finish. At the beginning, the two companies’ boards will have many informal discussion to determine whether their intentions align. Following these discussion, there will be a formal negotiation, a letter of intent, due diligence, an agreement, and ultimately, the execution of a deal and transfer of payment. Because mergers and acquisitions are very complex, especially from the legal and accounting perspectives, companies will typically use advisory services from an investment bank to conduct the transaction.

Ultimately, the goal of mergers or acquisitions is to create synergy. Synergy refers to the idea that the whole is greater than the parts - so that when two companies combine their operations, the resulting company will be more profitable and efficient. When such transactions are successful, companies may take advantage of economies of scales, expand their market presence, and gain a competitive advantage.

M&A in the agricultural industry

Most recently, news broke regarding German drug and crop chemical producer Bayer’s takeover bid for US seeds company Monsanto. This transaction, which combines two large agribusinesses, may have surprised some. However, this was only one of many M&A transactions in the agricultural industry. Why is this case? As mentioned before, M&A deals can be profitable for the companies involved. In the case of agribusiness, there are many factors at play that make these transactions increasingly necessary for success. Here are some key points relevant to the Bayer-Monsanto deal, and to the rising trend of agricultural mergers and acquisitions.

Consolidations are frequent in shrinking industries. When the size of an industry gets smaller, demand for the industry’s products decrease and cause companies to be less profitable. To overcome these challenges, companies aim make deals that will allow them to create synergies, decreasing operating costs and increasing production efficiency. For companies in the agricultural industry, M&A transactions are increasingly present because of the shifting weather patterns and declining global farm economy. Prices for wheat and corn have fallen in the last four years, hurting seed and other farm-related companies.

Synergies not only benefit companies involved; they can also benefit customers. Another benefit of consolidation is often new innovation - when two companies are able to combine their research and development teams to create new, better products, the customers also benefit. However, if consolidation does not result in innovation, the benefits of a deal will only be short-term. Though you can grow profit in the short run without the creation of new products, it would be impossible to sustain profit growth over the long run. Therefore, unless Monsanto and Bayer can work together to produce innovative changes in an aging and shrinking agricultural industry, they may not be able to capture longer lasting profit gains. 

Just because the deal was announced, doesn’t mean that the transaction will be completed. Mergers, especially ones as large as this one, come under intense scrutiny from regulatory bodies. Mostly, authorities are concerned that such a deal will significantly reduce competition in the industry, thus negatively impacting customers. For example, should Bayer and Monsanto consolidate, it would control over 25% of total market share for seeds and pesticides in the farm supplies industry. Should one company control too large of a market share, they can take advantage of customers by setting prices at a higher-than-desired level.

Though in this article, the agricultural industry was used as a key example, you’ll find M&A transactions in many other industries. Take the key lessons from this example and apply it to another industry to better understand why companies are making the choice to merge or consolidate. Mergers and acquisition transactions are an important component of capital markets, and having at least a fundamental understanding of these deals is helpful, especially when making conversation with an investment banker!

Siyu Wu is from Colorado and attends Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. Siyu will graduate in 2018. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.

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Building a Winning Brand

By Valeria Tirado

April 11, 2016

I recently had the chance to attend Forté’s College Fast Track to Finance Conference in NYC on March 18, and I had a great time! I learned a lot from many successful women in business and met some awesome college ladies as well.

Perhaps one of the most intriguing speakers was Marjie Terry, who works for Great on the Job. Her presentation was called, “Building a Winning Brand,” and contained a lot of useful information that I’ll be using in my own job hunting.

Luckily, I took some notes and want to share some of the highlights of her presentation so that you can benefit from them too!

Own the room

Success = confidence = competence. These are the words that really kicked off Marjie’s presentation and they had a strong impact on the room.

Owning the room means making yourself stand out, in a good way, particularly when meeting potential employers and colleagues. Confidence is key when it comes to owning the room. Even if you don’t feel 100% confident, looking confident is what it’s all about. As the saying goes, “fake it till you make it.”

Be sure to have strong body language, stay open, maintain eye contact, and use gestures. When it comes to speaking, make sure you maintain your pace, avoid fillers, and avoid tentative language.

Have great content (your brand/pitch)

Ever heard of an elevator pitch? It’s basically a short summary of yourself, usually meant to persuade someone (like a potential employer) why they should be interested in you. They can be as short as 15 seconds, but some can be up to a minute long, although Marjie said 30 seconds is an appropriate amount.

I had some difficulty the first time I tried my pitch, but then Marjie offered us some great guidelines to follow. First, identify your areas of expertise; what can you talk about at length? Next, consider what you want to be known for; your ability to adapt, your ability to solve problems, being successful in the world of finance? Finally, think about how you can get there; getting an MBA, obtaining a job where your skills are challenged and can be refined?

Once you answer all these questions, you can use the answers to fill in this basic elevator pitch template: 1) destination (I’m interested in this position/career because…); 2) back story (I have these skills or experience relevant to this position…); 3) connect the dots (That’s why I qualify for this position…) - be sure to explain the connection between your skills/experience and the position/career in this part.

Make people love you

And the easiest way to do that is by being yourself. Nobody is going to want to hire someone who lies. If you don’t have much experience in the industry you’re applying for, then just be honest about it. If not, what happens when they ask you to work on a project they chose for you because of all this experience you raved about?

If they ask you a question you don’t know the answer to, don’t make things up, just say something like, “I don’t know the answer to that right now, but let me get back to you on that.”

Another easy way to make people love you is to be generous, and by that, I simply mean be generous with sharing information about yourself. Sure, people love to talk about themselves and being a good listener is important, but employers are also really interested in hearing about you too.

Last but not least, be transparent – speak your mind! It’s okay to disagree sometimes, in a respectful manner, and you’ll gain respect from your colleagues this way too. Nobody likes a yes-man, after all. Be your own person!

Be sure to look for any Forté events near you because I highly recommend you attend one as they are really informative and fun! Forté even offers a $250 travel stipend for their college events so you don’t have to miss out just because of money. I guarantee you’ll also make some new friends (I know I did) so you can’t lose!

Valeria Tirado is a senior at Rutgers University – New Brunswick with a major in Environmental and Business Economics. After graduation, she is interested in working with a non-profit organization like the World Wildlife Fund and eventually wants to go to grad school for Economics. Among the schools she is considering are NYU and Vanderbilt. Valeria can be found on Twitter at @valeriat94.

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From Zero to Pitch: Understanding Financial Statements

By Siyu Wu

March 7, 2016

It is impossible to create a strong and well-supported investment recommendation without thorough analysis of the financial statements, which is why the next few installments will give an overview of the three key financial statements and how they can be used in valuation.

Financial statements are a valuable resource because they reveal a lot of objective information about company and industry health. The information allows for comparing different companies to evaluate a company’s’ past and future performance. All public companies are required to make their financial statements available to the public, so you can easily find a company’s 10K (annual report) and 10-Q (quarterly report) on its website. 

Balance Sheet

The balance sheet serves as a financial snapshot at a single point in time for the company. There are three main parts of the balance sheet: assets, liabilities, and shareholder’s equity. The relationship between the three components is: assets = liabilities + shareholder’s equity.

Assets are the resources that the company owns that are expected to generate future value for the company. They can be separated into two categories. Current assets can be converted to cash within one year and include cash, accounts receivable (money owed to company by its customers), and inventory (assets that will be turned into products). Non-current assets are those that cannot be easily converted to cash, including property, plants, equipment (PP&E), and goodwill.

Liabilities are what the company owes, and also can be categorized into current and non-current liabilities. Current liabilities include accounts payable (money owed to suppliers), salaries payable (money owed to workers), and short term debt.

Shareholders’ equity refers to the difference between assets and liabilities, which includes stock representing equity ownership in a corporation, retained earnings that are reinvested in the core business or used to pay debt, and treasury stock.

The balance sheet gives information about the liquidity of a company, the company’s assets, and its ability to meet long-term fixed expenses. However, it is limited in that it does not include certain resources, such as human capital.

Income Statement

The income statement shows the profitability a company over a certain period of time. The basic relationship here is: revenues - expenses = net income. Revenues are the sales the firm makes from selling goods and services, calculated by multiplying the price of good by the volume sold. Expenses are the costs a firm incurs to produce goods, also including administrative expenditures, depreciation, interest, and income taxes.

Finding the net income allows us to analyze the company’s earnings, which are used to pay dividends, repurchase shares, and reinvest. Specifically, the earnings per share (EPS) indicates how much a stock earned per share and is calculated by net income divided by number of shares outstanding.

Companies release quarterly earnings data, which allows investors gauge the profitability of the firm. Prior to earnings being released, Wall Street analysts will predict a consensus on the EPS. If reported earnings beats this estimate, the stock tends to go up. If the reported earnings falls short, then the stock may go down.

The income statement (AKA profit and losses) summarizes a firm’s profits and losses and also gives us the opportunity to calculate ratios to see how operations have changed. However, it is difficult to compare these ratios for companies in different industries. Also, there are many different accounting practices that limit the comparability of these numbers. Thus, it’s important to look at footnotes on the statement!

Cash Flows Statement

The statement of cash flows shows information about the company’s cash inflows and outflows, which is different from net income in that the cash flow cannot be manipulated through accounting practices. The income statement uses accrual accounting to smooth the cash flow, with issues such as revenue and cost recognition. These facts are not hidden in the cash flow statement. This statement indicates a firm’s liquidity and long-term solvency.

The cash flow statement is composed of three sections: operating activities, investing activities, and financing activities. In operating activities, inflows refer to cash received from customers while outflows occur through buying inventory, paying salaries, and paying suppliers. In investing activities, inflows include the sale of PP&E and outflows include capital expenditures and acquisitions of other firms. In financing activities, inflows come from cash received from borrowing or issuing stock, and outflows come from repaying debt or dividends.

Free cash flow (FCF), which is operating cash flow subtracted by capital expenditures, and represents what the company has left over at the end of a period after paying the money needed to maintain its asset base. This is an important metric that indicates the amount of cash a company produces.

This article focused on introducing the three financial statements so that we may go into detail about financial ratios and metrics we can calculate from the information provided by each financial statement.

The balance sheet, income statement, and cash flows statement each show important but different financial information about a firm, all of which is critical in evaluating the company’s stock.

Siyu Wu is from Colorado and is currently a sophomore at Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.


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Getting the Job (Done): Business Analyst

By Valeria Tirado

Recently, I got the chance to interview Marissa Solomon, a business analyst working at McKinsey. McKinsey is a worldwide management consulting firm who currently counsels about 80% of the world’s largest corporations. That’s quite impressive! They are a great company with a bright future and I’m glad Marissa took the time to answer some of our questions.

Q: How did you first come across the opportunity to intern with McKinsey?

A: I learned about McKinsey through on-campus recruiting during undergrad. Some of my greatest role models in college went to work at McKinsey both as summer interns and full-time analysts, which made me very excited to learn more about the opportunity to intern there.

Q: Did any of your fellow interns also hire on full-time? If so, do you keep in touch and support each other?

A: I believe my entire Summer Business Analyst class re-joined full-time. Almost three years later, we are still an extraordinarily tight community.

Q: Now that you’re full-time, do you feel like the internship prepared you well enough for what you do now or is it very different?

A: Yes, I definitely feel interning prepared me very well for the full-time business analyst role. McKinsey does an excellent job designing the summer internship to completely resemble the real-life, full-time experience. Summer interns are treated as full-time analysts on the team, visit the client site with the team members, and are expected to actively participate in problem solving sessions and client meetings.

Q: Has the transition from internship to full-time been difficult or have you adjusted well?

A: The transition from internship to full-time is definitely an adjustment – for reasons as simple as moving to a new city and giving away the often flexible life of an undergrad! That said, the firm matches you with buddies, mentors, and resources from day one to support you in the transition. My team on my first engagement helped me carve my path at McKinsey, supported me and helped me see many exciting opportunities.

Q: What are the key responsibilities of a business analyst?

A: Before answering what the responsibilities of a business analyst are, it may be helpful to begin with describing what management consulting is. It may seem obvious, but many people do not understand what we do day-to-day. I would describe consulting as the science and art of working with organizations to solve their most complex problems and opportunities.

This translates to responsibilities in many ways, and I would say there are three primary things: (1) you have the responsibility to your client to be a problem solver, thought partner, and trusted advisor, (2) you have the responsibility for your specific part of the larger project and understand how it contributes to the overall, and (3) you have the responsibility to push the team’s thinking, disagree when necessary, and ensure the team is on track to delivering impact.

Q: In your opinion, what are the best skills a person in your field can have?

A: The great thing about working at McKinsey is the diverse backgrounds you will come across. There are people across industries, with different professional degrees, from different geographies, but amidst all the diversity, there are two main qualities management consultants should have. First, they should have strong problem solving skills – both conceptual and analytical. Second, they should be able to work well in teams – both client and McKinsey teams.

Q: Can you walk me through a typical day at work?

A: The exciting thing about McKinsey is that there is no “typical” day of work. My day may look very different depending on the client I am serving, the industry or geography we are in, and my team. On a typical engagement, I go to the client site Monday through Thursday. While there, my days will consist of pushing forward my discrete piece of work on the study, meeting with clients, and problem solving with the team. We have numerous team brainstorms during the day to share updates on our work, break apart tough problems, and ensure impact is being delivered.

At the end of the day, we often go to dinner together, especially on travel studies. The great thing about consulting is the immense amount of flexibility. At the beginning of each new engagement, the team will set “norms” for how we want our days to look – for example, some people like to go to the gym in the evenings and log back on to finish work later, which is completely accepted!

Q: Do you work directly with your clients? How do you create a relationship with your clients?

A: Yes, all members of the team work directly with our clients. That is what I consider the most fulfilling part of the job. It’s very cool that as a 20-something business analyst, you have the opportunity to build and maintain strong relationships with seasoned experts across industries and companies. Building relationships often starts with the business analyst owning a specific piece of work – knowing the details and sharing information that the client might not otherwise know.

Q: Do you find yourself more often working alone or with a team? Which do you prefer?

A: I am almost always working with a team. That’s what management consulting is all about. I definitely prefer that, as it makes the day more fun and enables the team to arrive at a better solution and have greater impact. If you do have something you need to push on, it is always appropriate to leave the room or put in headphones. I do that quite a bit, too.

Q: What is your favorite part about working with McKinsey?

A: The people. Hands down. I have never met a group of more inspiring people. I learn just as much from the people I have met here as from the work itself. I am so grateful for the numerous communities within McKinsey– whether it’s a women’s network, industry practice, or my business analyst class.

Q: What advice would you give somebody aspiring to become a business analyst?

A: I would encourage anyone who is excited about solving really tough problems and helping clients capture new opportunities to consider a career in management consulting.

In terms of tactical advice, I would recommend you talk to any friends or contacts in management consulting to really learn what the job is about. There really is no typical day, so it’s helpful to learn about the different engagements people do. I also would encourage you to try to get a flavor of the consulting experience in undergrad. You can sign up for classes that primarily focus on group projects to get the team experience, you can join a consulting club, or you can find organizations that help clients or others tackle big problems.

It was a great opportunity being able to learn more about McKinsey and what a business analyst does. McKinsey sounds like a great company to work for with great people. Marissa mentioned that her favorite part is the people and how she learns from her colleagues as much as she learns from the work itself; I think that’s something we should all look for in a job. As someone once said, “if you’re the smartest person in the room, you’re in the wrong room.” Surround yourself with people you can learn from and you’re bound to be successful.

Once again, a big thanks to Marissa and McKinsey for lending us their time!

Valeria Tirado is a senior at Rutgers University – New Brunswick with a major in Environmental and Business Economics. After graduation, she is interested in working with a non-profit organization like the World Wildlife Fund and eventually wants to go to grad school for Economics. Among the schools she is considering are NYU and Vanderbilt. Valeria can be found on Twitter at @valeriat94.

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From Zero to Pitch: Creating an Investment Recommendation

By Siyu Wu

December 9, 2015

Up to now, Girl Talk has given you a glimpse into the world of finance and also offered a range of resources for learning more. But perhaps the best way to truly understand finance, is to do finance.

This series will take you through the different phases of creating an investment recommendation so that you may pitch your own stock, either for personal investing or for an interview.

The first step? An introduction to the stock market! (Note: All key financial terms are italicized.)

What are Stocks?

Stocks (which may also be referred to as equities), essentially, are shares of the company that you may buy to become a shareholder of the company. Companies being traded in the stock market are assigned a ticker, which is a one to four letter symbol (e.g. Nike is NKE). Stocks may be classified and categorized in several ways.

First, is the distinction between common, preferred, and treasury, which are three different types of stocks.

  • Common stocks, as the name suggests, are the most commonly issued publicly traded stocks by companies. Common shareholders are on the bottom of the ownership structure; in the case that a company liquidates, they have right to assets after bondholders and preferred shareholders.
  • Preferred stocks are one step above common stock in that their dividends pay out before dividends for common stock are paid out.
  • Treasury stocks are the shares held by the own company that were bought back or never issued to the public.

Stocks may also be divided into the three categories of growth, value, and income stocks.

  • Growth stocks are companies who have great growth potential, perhaps because of its unique product or position in the market. These stocks are difficult to identify, don’t pay dividends, and generally are riskier. Many technology stocks are growth stocks.
  • Value stocks are stocks that tend to trade at a price lower than its fundamentals, hence being undervalued. These stocks often have high dividend payouts and low price-to-earnings ratio.
  • Income stocks are stocks that are known for regularly paying out dividends and typically have lower volatility. Many mom and pop investors looking for return over a long period of time will invest in income stocks.

Another way to classify stocks is as cyclical, defensive, or blue-chip stocks.

  • Cyclical stocks are stocks whose prices follow the business cycle and overall economy. These companies often relate to discretionary goods, because consumers buy more of these goods when the economy is improving.
  • Defensive stocks are also known as non-cyclical stocks. These companies’ performance are not correlated with economic conditions, so they have less losses during economic downturns. Utilities companies are one type of defensive stock, as they are a necessity for consumers regardless of the economy.
  • Blue-chip stocks are typically companies that are well-established and financially sound. These stocks typically do well despite economic downturns, because they are known for selling high-quality goods and have long histories of profits. Blue chip stocks are typically considered a less volatile investment option.

What is the Stock Market?

With an understanding of stocks, we can better understand the stock market, which is the market where stocks are available publicly for selling and trading. The stock market is interconnected globally, with the global market capitalization currently at around $294 trillion! To make a distinction, the stock market consists of every stock exchange, which is where stocks are actually traded.

There are many stock exchanges, both in the US and around the world. In the US, two major stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Stocks on the NYSE have one to three letter ticker symbols and stocks on NASDAQ have four letter tickers. Internationally, some major exchanges include Hang Seng in Hong Kong, Nikkei in Japan, and the London Stock Exchange. Do note that some stocks don’t trade on the stock exchange, but rather traded “over-the-counter”. These stocks are typically too small to meet requirements for being listed on an exchange.

Within the stock market, stock indices serve as grouping of stocks that measure past performance and trends; these help show market trends. There are several notable indices used for this purpose. The Dow Jones Industrial Average (DJIA) consists of thirty major companies, including Disney and General Electric, traded on either the NYSE or NASDAQ. This is a narrow representation of the overall market, but is widely quoted by in the press. The Standard and Poors (S&P 500) index chooses 500 firms selected by a committee. This index intends to reflect the risk and return characteristics of large cap companies. Two other indices are Russell 2000 and Wilshire 5000.

With this basic understanding of stocks and the stock market, you can move forward to learning about valuing stocks and investing in them, which will be covered in the next parts of this series.

Siyu Wu is from Colorado and is currently a sophomore at Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.

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