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Financial Engineering

Financial Engineering Trading learning

Financial Engineering

Effectively managing personal finance is the prime challenge every newbie earners facing.

Anyone who uses technical tools, financial skills, statistics, computer programmer, etc in personal or corporate finance to achieve the financial goal is called a financial engineer.

Financial Engineering helps individuals to analyze the risk and returns of their saving and investment portfolio. Understanding the financial engineering concepts and strategies, helps individuals to reduce the total risk and maximize the profitability in financial matters.


In general, Financial engineering is multidisciplinary engineering in the domain of finance which involves financial theory, engineering tools, mathematical statistics, and programming.

  • In personal, Financial engineering is defined as the application of financial analysis and mathematical tools to achieve personal financial goals.
  • In official, Financial engineering is a quantitative analysis used by investment banks, insurance agencies, etc to achieve financial growth targets.

Financial engineering is not traditional professional engineering, however many universities offering a postgraduate degree in the field of financial engineering. The quantitative analyst is a broad term that any person who uses math in financial planning and strategy development. In general, any person who uses mathematical analysis or engineering skills like programming or modeling in the domain of finance can be called a Financial engineer.

How Financial Engineering help to achieve the Financial Milestones to become Rich.

The first thing that needs to get self-convinced is that everyone can do financial engineering at their own level. Most people when hearing the phrase “financial engineering” get worried and think it is only for financial professionals. Financial engineering is a scary term for those who don’t know what it is and worried about Finance and Accounting. The fact is everybody, who earns money in the form of salary, the commission is already doing financial engineering in their own way.

Every individual will be in a particular milestone of financial learning, the only thing that needs to do is to get self encouraged and learn as much as possible about the next level of the financial milestone. Once start learning, every newbie investors start their on financial engineering and starts rewarded with more money. It is the process of using financial tools and techniques to make investors’ investment resources more effective.

Every investor has a financial maturity, someone will have low financial maturity and the other one have a high financial maturity. We can create financial milestones for every investor. Financial engineering help investors to improve the financial maturity, from low to high. Consider cash as the starting point of financial maturity and stock issue after starting a corporation as our last milestone.

Financial learning Milestones:

Cash :

  • In this milestone, everyone needs to learn about cash inflow and outflow, I.e. income and expense management.
  • Cash is the one tool that helps to make more cash by investing.

Budget :  

  • Learning about budget planning helps better track and manage money.
  • Once the budget in place, a newbie earner can predict and plan the entire financial needs for the month, it will help to manage more money for saving.

Savings:

  • Saving is one of the prime milestones in financial maturity.
  • By learning about the different saving methods, a newbie earner can keep safe a portion of the income for future financial needs including emergency fund requirements.

Investments:

  • Understating different Investment options like Mutual funds and the advantages of investment with respect to saving will help a newbie earner to put a portion of earnings for the higher returns.
  • Once start investing money start to make more money, even investor is sleeping.

Insurance:

  • Insurance is a financial instrument that supports us at the time of emergency.
  • In this milestone, all the newbie learners need to understand different insurance plans and chose a plan which suits for life.

Tax and Tax Saving:

  • Understanding the TAX, TDS, and Tax saving methods is necessary for every earner, otherwise a portion of earning will goes, before we touch it.
  • Once we learn about TAX saving methods, we can use that portion of the money to generate income for us instead of paying it as TAX.

Asset and Liability management:

  • Learning about the asset and liability helps newbie earners to manage their earnings in a better way.
  • One of the prime financial mistakes done by the newbie earner is spending money on liabilities thinking of it as an asset instead of investing in assets.

Business Income:

  • Understanding the business and passive income is one of the important financial learning milestones.
  • Once start generating the passive income, overall earnings start to grow exponentially even during non-business hours.

Financial control:

  • In this stage of financial learning, an entrepreneur starts expanding their business to a higher level.
  • By understanding financial control, business owners need to learn to make a proper business plan to maximizing profit at a lower cost.

Company registration & Legal Entity:

  • In this stage of learning, an entrepreneur needs to learn about the methods of converting the business as a corporate legal entity and safeguard personal assets.
  • Income needs to generate from multiple streams including passive income.

Stock issue:

  • In this stage of the financial learning milestone, an entrepreneur needs to understand the implication of listing the company in a stock market.
  • Once it listed, the growth of the company and asset growth will be based on the growth of the value of the share in the share market.

Everyone can always improve their financial maturity by learning and entering into higher levels of milestones. An investor first needs to identify the level of financial maturity, and what additional skills and tools needed to move to the next step. First, understand the next level and plan the ways and implement the ideas which help to reach the next step for financial maturity.

Improvement in financial maturity help to manage the resource effectively, which in turn helps to accumulate more money. Financial engineering is the stepping stone to the scale of financial maturity. Once you start managing your earnings in a better way overall your wealth increases exponentially. All the investment tools are derived from financial engineering are designed to give more money to the investors.

What is the importance of Financial Engineering in Personal Finance?

In Personal finance, financial engineering help to solve financial problems by using mathematical and engineering techniques. Financial engineering addresses current financial issues and develops an innovative financial product that can solve the current problem and guaranteed future growth. Financial Engineering uses knowledge in the fields of financial statistics, economic conditions, and computer programming.

For a normal investor, they can execute Financial Engineering by using the available analytical, financial tools and techniques like Microsoft excel, different charts available online, previous data available at your disposal, to create the most valuable investment portfolio to achieve the personal financial goals.

KEY Points

  • Financial engineering is a mathematical technique to solve financial problems.
  • Financial engineers help to develop new investment tools to achieve financial goals.
  • Financial engineering can work in personal finance as well as corporate finance.
  • Financial engineering helps to originate new financial products and strategies.
  • Financial engineering help to frame the road map to achieving the financial goals.
  • Financial engineering enhances the knowledge in each milestone in personal finance.
  • Financial engineering uses quantitative modeling and programming in the financial domain.

Two streams of financial engineering Skill.

Computational and mathematical are the two streams of financial engineering

  • The use of computers to analyze the data and to develop the algorithms for financial modeling is called Computational finance.
  • The application of mathematics in finance is called the Mathematical finance

Using mathematical modeling and computer engineering, financial engineers are able to issue new financial tools and test them.

How Financial Engineering is used in Personal and Corporate Finance.

The term Financial engineering came, as it is a combination of “Finance” and “Engineering”. The main idea is that Finance professionals or an investor can design an investment portfolio in the same way an Engineering designs a machine.

Financial Engineering helps to develop innovative investment tools like new debt offerings, new SIP investment plans, new trading strategies, etc which are needed for investors and companies.

Financial Engineers help to Analyze and Predict.

  • The performance of the newly developed investment tool.
  • Viable the tool in the current market scenario.
  • Profitability in the long run.
  • The risk factor in the new tool for the investors.

There are many newbie earners and investors who spend a lot of time thinking about whether their portfolio will meet the investment goals. If they spend a litter time analyzing the portfolio and the past performance and make mathematical models and statistics analysis, they can easily reach a conclusion. This analysis is the basis of financial engineering. And in fact, major companies do financial engineering to create new financial instruments for the customers. Investors can use easily available online algorithms and programs and software which can help them to reach a decision.

Criticism of Financial Engineering

  • As there are many new investment tools that come into the market with the help of financial engineering, investors get confused and unable to select suitable investment tools for their future goals.
  • As now many of the investment tools are designed on the basis of financial engineering analysis and modeling, it becomes complex for newbie earners to understand the financial instruments and they start to feel it is complex to understand.
  • Financial engineers do not change the operations of the company but take and flip the financial statements inside out and present the company or the financial instrument in another way.

Financial engineering and Risk Management

Financial Engineering is a multidisciplinary field that is useful in finance and other technical disciplines. It helps investors to get a good return on time and money invested. Financial engineers will work for individual investors, companies, trading firms, banks, etc. It helps the investors to analyze the risk involved in each investment tool as it gives the future predicted performance data by modeling. These risk factor data help investors to choose the right investment option to achieve their financial goals.

CONCLUSION:

Financial engineering plays a key role in the financial industry as it encompasses programming and quantitative financial modeling. For the newbie investors, it helps in risk management for the portfolio selection and in compliance with the financial goals. Financial engineering is an interdisciplinary field, that combines fundamental financial concepts, mathematics, computer programming, and statistics, which guide investment decisions.

To expertise in financial engineering, it is not mandatory to have a professional degree, every newbie earners and investors can do it by continuous analysis of their own portfolio. It is ideal to understand the basic concept of finance and financial analysis before start investing in high-risk investment instruments like equity.

Look at yourself and identify where you stand on the financial learning milestone of financial maturity. Learn about the next level and find routes to the next higher levels, and go on still reach the last stage of financial milestone and get into the world of financial freedom.

To improve your financial skills, we recommend reading the 7 best financial books. 

Thanks & Regards

MyMoneyBooks.

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Harry
Harry J P is a Business development and sales professional passionate about sharing knowledge in the domain of sales, and personal finance which helps in Personal financial learning for newbie earners. This blog came out of the experiences in the domain of personal finance, business development, and the share market.

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