investments Archives • My Money Books

Financial Engineering

Harry — Sat, 20 Feb 2021 14:09:38 +0000

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.

50 SHARE MARKET Q&A

Harry — Thu, 21 Jan 2021 16:13:27 +0000

50 SHARE MARKET Q&A

This blog is designed to answer the top general 50 questions people asked on Google. All the questions are answered in simple bullet points format for easy understanding of the users. This blog mainly covers the questions about equity, share market, and futures and options. After going through all the below questions, a newcomer to the share market will have a basic idea about the share market and how to make money from it.

Open Demat Account

1. What is the share market and how it works?

Share market is the place to trade the shares of pubic listed companies.
Companies float shares to the public through an initial public offering (IPO) to raise capital in the Primary market, through investment banks, financial institutions, brokers…
Then these listed stocks bought or sold on an exchange, these exchange is share market.
A share market is a secondary market where traders can sell and buy stocks among themselves.
The stock market works much like an auction house, it enables sellers and buyers to negotiate prices and make trades.
In the stock market, Investors can sell and buy these stocks among themselves.
The stock exchange tracks the demand and supply of each listed stock.

2. What is the difference between the share market and the stock market?

In operation wise, both stock market and share market is similar in operation.
The difference between the share market and the stock market is, in the share market only shares of the listed companies are allowed for trading but in the stock market, traders can trade any financial instruments like Shares, Mutual funds, Bonds, Derivatives…

3. what is the Demat account?

A Demat account is an account that is used to hold securities and shares of companies in electronic format.
Dematerialised (means converted from physical to electronic form) account is the full form of Demat account.
The purpose of the Demat account is to hold shares in dematerialized form and trade the shares online, through any trading platform provided by brokers.

4. Is the Demat account safe?

Demat accounts are safe and secure.
Demat accounts are opened with the NSDL or CDSL, both depositories have their own security measures to protect the holdings of investors.
All the brokers also take their own security measures to avoide the misuse of Demat account.

5. Is the Demat account free?

Now most brokers made the account opening free, but need to pay a maintenance fee every year.
If it is a basic Demat account then there are no charges up to the certain limit of holdings.
Some brokers charge to customers monthly and some yearly to the customers.

6. Which is better CDSL or NSDL?

Technically there is no difference between NSDL and CDSL depositories.
NSDL started in the year 1996 and CDSL started in the year 1999.
In NSDL, NSE is the largest shareholder and CDSL has BSE as the shareholder.
Depository charges of CDSL and NSDL are slightly different.
The revenue source for depositories is the DP charges which they charge during the sell order.

7. What is the stock market?

A stock market is a network of exchanges used to trade the shares of companies listed on an exchange.
The stock market is a safe and regulated auction house where sellers and buyers can negotiate prices and trade on the stocks of listed companies or any financial instruments.

8. How can I open a Demat account?

A Step-by-Step Guide to Open a Demat Account

Step 1: Choose the broker on which, we prefer to open the account.

Step 2: Submit Demat Account Opening Form in an online or offline format

Step 3: Fulfill KYC (Know Your Customer) Norms in the portal.

Step 4: Complete the Verification Process.

Step 5: Upload all the required documents in an online format or submit signed documents to the respective office.

Step 6: Get the Demat ID Number from the broker.

9. Can we withdraw money from the Demat account?

Our money is in the Trading account not in the Demat account.
We can withdraw money from the trading account at any time, but for some brokers, it will take some processing time.
To withdraw money customers need to login to the online portal of trading account and select the option ‘funds'( option name vary broker to broker) and select the withdraw funds option in it.

10. Can I have 2 Demat accounts?

Yes, investors can have multiple Demat accounts
It is legitimate to have multiple Demat accounts and trading accounts, with different brokers.
It is not allowed to have multiple trading and Demat accounts with the same broker or the same DP.

11. Is NSDL a govement company?

Both CDSL- Central Depository Services (India) Limited and NSDL- National Securities Depository Ltd. are government registered share depositories in India.
The function of both depositories is to hold shares in an electronic form.

12. How do I know if CDSL or NSDL?

By checking the first 2 digits ( 1^stand 2^nd out of 16-digit) of the Demat account, the account holder can identify, it is with CDSL or NSDL.
If the account has only numeric character, then it is with CDSL (Eg:1234567812345678)
If the account number starts with “IN” and followed by a 14 numeric code, then is with NSDL( Eg: IN12345678912345).

13. How to buy shares?

We can buy stocks or shares through any online stockbroker, by opening an account with them.
Once we open the account and add funds to the trading account, you can buy stocks through the broker’s trading platform or through the website.
Other options are directly or over phone trading services provided by full-service stockbrokers.
Also, we can buy stock directly from the company or through applying IPO.

14. What are the minimum and maximum age limits for opening a Demat account?

There is no minimum age limit for investors to open a Demat account and invest in the stock market.
Both adult and a minor can invest in stocks after submitting their respective documents for account opening.
For a minor account, it must be opened in a minor’s name by the parents or the appointed guardian.

15. What is NSDL DP?

DP is the short form of Depository Participants, who is an intermediary (Broker) between investors and the depository (NSDL or CDSL).
NSDL depository provides its services to investors through Depository Participants (DP), who work as market intermediaries.
All DP comes under SEBI regulations.
DP is a financial service providing organization.
DP can be banks, share brokers, custodians in the share market, financial institutions who provide the service to investors.

16. What trading account means?

In simple language, the Trading account is an account used to trade shares, bonds, commodities…
A trading account helps investors or traders to trade securities, cash, or other holdings.
In the share market domain, a trading account is a primary account in 2 in 1 or 3 in 1 account for traders.

17. How do I start a trading account?

Step by step process to open a trading account:

Step 1: Select the stockbroker or firm with whom need to open the account.

Step 2: Compare brokerage rates and other charges for trading.

Step 3: Decide the mode of opening online or offline. Most discount brokers provide offline account opening options.

Step 4: In the online method, fill up the details and upload the required documents. In the offline method, visit the office and submit the required documents.

Step 5: Re-verify all the details and submit, remaining process broker will take care of.

18. Is day trading illegal?

Buying and selling or vice versa in a single day are called day trading.
Day trading is neither unethical nor illegal.
Day trading is highly risky if do it without learning it.
Day traders should have emotional control to handle the losses, which day trading can bring.

19. What is the share market meaning?

Share market means a market where selling and buying of share happens.
A unit of ownership of the company is called Share of the company.
By buying shares of a company, an investor become the partial owner of the company.
If the company grows, the value of share also increases and the invested asset will increase.
Investors will get profit by selling the shares of the companies if it is more than the buy price.

20. How do we buy shares?

We can buy or sell stocks through an online stockbroker trading platform.
Once the fund added to the trading account, we can buy stocks through the broker’s trading platform during market hours.
If it is a full-service broker, investors can buy stock directly from the office or over the phone trading service during the market hour.
Some discount brokers also provide phone trading services.

21. What are the 2 types of stocks?

Common stock and preferred stock are the two main types of stocks of companies.
Common stock is an equity share of a company, i.e a security that represents partial ownership in the company. At the time of liquidation of companies, common stockholders get only whatever assets remain after paying for bondholders, creditors, and preferred stockholders.
Preferred stock is like a combination of equity and a debt instrument It is generally considered a hybrid financial instrument. During liquidation Preferred stockholder receives the money along as a creditor in the company.

22. How many shares should I buy?

An investor can buy any number of shares, which traded in the share market.
About 20 different companies from different sectors are ideal diversification number, advised by most financial experts.
During the selection of stocks, it is advisable to diversify across industries and sectors.

23. How do I start investing?

The first step is to open a Demat and trading account with a broker.
Select the companies that need to invest.
Prepare financial planning including goals.
Buy the stocks as per our preference, which will help to meet our financial goals.

24. When should I buy stocks?

For investment, there is no right time to buy shares, any time we can buy and start investing.
If it’s for long term investment, only consider fundamentally strong companies.
It is the responsibility of every investor to do research and get confident that price will rise in the short or long term, before investing.

25. How do you make money from stocks?

An investor can make money by booking profit at the time of selling of stocks.
Investors can also earn money by getting dividends from the companies.
Dividends are usually paid on a yearly or half-year or quarterly basis to the shareholders.

26. How can you select a good stock?

Below are the 8 things to consider in selecting the stocks.

Market Capitalization
Stock price
Possibility of revenue growth of companies.
Earnings Per Share of the stock.
Dividend yield.
Historical prices data at least for last 5 years
Positive technical analysis
The Sector

27. Where do I buy stocks?

Investors can buy and trade it in the stock market through brokers’ trading account.
First, need to open a Trading and Demat account with a stockbroker, and then using their platform investors can buy stocks

28. What are the different stock sectors?

There are basically 1o main sectors in the stock market based on domain

Information Technology.
Financial sector.
Consumer
Energy
Utilities.
Health Care.
Real Estate.
Materials.
Communication Services.
Consumer Staples.

29. Can I buy 1 share?

There is no minimum order limit to buy shares from the stock market.
An investor can buy 1 share of listed companies in stock

30. Can you get rich from stocks?

An investor can get rich from the stock market if invested in growing companies.
To get rich investors to need to wait for a long time frame like 10 to 15 years.

31. Can I buy a share today and sell tomorrow (BTST)?

Some brokers provide the option of BTST, Buy Today, Sell Tomorrow.
Traders can sell the shares before the actual delivery before credited in the Demat account.
With BTST option, a trader can sell shares within T+2 days.

32. Should I buy red or green stocks?

An investor can buy green or red stock.
Green means the prices in the recent past have gone up (positive momentum), whilst Red means prices have gone down( negative momentum).
It is advisable to buy stocks that have the chance of having positive momentum.

33. What is a good price for a stock?

If P/B (price-to-book) ratio is less than 1 is considered as a good value for a stock to purchase.
If the value is less than 1 is indicating undervalued stock.
Some value investors consider P/B value under 3.0 is potential to buy.

34. How are the stock’s total holdings calculated?

The number of shares of stock holding multiplied by the current market price is the method to calculate the total holdings.

35. What time of day is best to buy stocks?

Regular trading begins at 9:00 m. and ends at 3:30 PM.
The best trading time of the day is between 9:30 AM and 3:00 PM as the market will be comparatively stable after half an hour of market opening and half an hour before market closing.

36. What is a good amount of money to invest?

It is ideal to decide on the base of percentage of Income.
Between 10% and 15% of your annual income is the amount most financial planners advise.
If possible to invest more percentage in value stocks will help to create wealth early.

37. Can I sell intraday share the next day?

Intraday trade needs to square off before the market hour close.
Some brokers allow converting Intraday position into delivery by paying the balance trading amount.
It is advisable to close the trade position in a day itself.

38. Can I sell shares without buying?

Traders can sell the stock without buying using the short sell option provided by the brokers.
Using the short sell method, traders can make money in equities markets without owning shares, during downtrend.
Using short sell, the trader is borrowing stock from a broker and sell the borrowed stock, and then buy it when the price drops.

39. Can I sell futures without buying?

Yes, futures can sell without buying them.
Trader cannot realize a profit or loss in futures trading until square off the position.
Square off means placing an apposite position order for the same quantity later.

40. How can I buy a future?

A futures contract is an agreement on an underline asset that traded on an exchange.
In a future contract, one party agrees to buy a given quantity of securities on a future date and another selling party agrees to provide it.

41. How can I buy Nifty options?

First need to add the NIFTY options to the watch list and select CE or PE, which need to buy.
Select the strike price and buy CE or PE by paying the premium.

42. Why is the option better than the future?

Option contract provides only the right to the buyer, not an obligation.
In option, the maximum risk to the buyer is limited to the premium paid.

43. What is the future in the share market?

Futures share market is a financial contract on an underlying asset.
A futures contract is an agreement between the buyer and seller to sell or buy a specified quantity of underlying equity share upon a price agreed on a future date.

44. Can I buy Nifty 50?

There is no option for an investor to buys Nifty 50 directly.
Nifty 50 is an Index comprising of the top 50 stocks listed in the share market.
We can buy 50 stocks in the Index so that we will get the same growth as Nifty 50 grows.

45. What is F&O trading?

F&O stands for Futures and Options, it is a derivative of shares in the stock market.
F&O derive their values from an underlying asset such as shares, currency, gold…

46. What is F&O expiry?

For every F&O contract, it will have an expiry date i.e. up to that date only the F&O contract is valid.
Before an option expires, its owners need to square off the position to realize their profit or loss.

47. Can I buy Bank Nifty?

Bank Nifty can buy like any other option contract.
Bank Nifty comprising 30 shares of different listed banks.
A trader can buy a call or put option on the base of a bullish or bearish market.

48. Can I buy Nifty intraday?

Yes, it is possible to buy or sell nifty options intraday.
The process of Nifty intraday trade is similar to normal option trade.

49. Can we invest directly in Sensex?

The Nifty consists of the top 50 listed companies of the share market and Sensex consist of 30 companies.
An investor can invest in the companies that come in this list so that they will get the same growth of Sensex or Nifty.

50. What is PE & CE?

PE & CE are the two terms of options trading PE-Put Option and CE- Call Option.
CE stands for “call European” (Right to Buy) and PE stands for “Put European” (Right to Sell).
When the market goes up, the premium will go up and when underlying security’s price goes down PE premium goes up.

CONCLUSION:

Share market is the place where people can buy and sell shares and make a profit. There are many ways traders can make money from the share market like intraday, BTST, short sell, position trading… More than a trading instrument, the share market is a perfect investment option for those who would like to have financial growth. Every investor needs to learn at least fundamental and technical analysis before investing in the stock market.

Thanks and Regards

Harry