Finance in IITR

The Finance Club has officially been started at IITR. It aims to provide the guidance required to pursue a career in finance. This blog attempts to clear some basic concepts and segregate its various sectors. It is followed by the experiences of some of our seniors who have successfully managed to secure jobs in their choice of domain.

Finance is the science of money management.

It is a broad term consisting of two aspects, one being how to utilize the available resources, and the other being how to raise funds.

Would you like to retire at 40? And then live on the returns of your investments?

Finance provides a basic understanding about how to utilize the money you are making, that is, using money to make more money. It helps you grow your assets at a tremendous speed rather than just storing the assets without putting them to proper use.

The strategic decisions regarding investments are vital to the success of any company. Many startups do not even launch because they fail to raise the required money. Others like Tiny Owl fail because they mismanage their expenses despite having a huge capital. So the next time you think of starting something of your own, make sure you have your finances set right.

Retail banks, investment banks and exchanges exist in order to facilitate these decisions and processes.The availability of finance enables organizations to develop, expand and exploit entrepreneurial opportunities. For individuals, institutions and even economies, financial development is an important prerequisite for overall development.

The Larger Picture

India has a GDP of 2.848 trillion dollars while Singapore has that of 0.323 trillion dollars. Does that mean we are in a better condition than Singapore economically?

The Indian banks offer an interest rate of 4% pa in savings account. But is our money actually growing or declining if we keep them in a savings account?

Zimbabwe printed a trillion dollar bill in 2015 which was being used by every middle class household there. Does that mean that people in Zimbabwe are all trillionaires?

There are tons of questions like these which affect our lives directly or indirectly. Suppose the banks close their doors tomorrow and are not able to pay us back our savings. There would be widespread chaos all around the country, but it is not something that can never happen. It has happened to the best economies of the world time and again like the US crash of 2008, the Great Depression, the German economic crisis of 1923 and more.

The study of such macroeconomic, microeconomic and geopolitical factors is important if one wants to understand the impact of global policies on markets.

Qualitative Concepts in Finance

How should you decide whether you must invest in a company or not?

Company A acquires Company B, what will its effect be on the stock price of A and B?

Is a huge company on the verge of bankruptcy? If so, how can it improve its present situation? What measures must it take?

Should a startup become public? If so, then how must it go about it? How much must it price its shares? What is the value of the company?

What is the difference between debt and equity? What factors determine which of them would be a better source to raise capital?

What is liquidity? Which is better, high or low liquidity? How can we analyze if a company is efficient or not based on its liquidity?

How do companies like Facebook and other social networking sites generate profit?

The qualitative part of finance deals with many such questions. It is mainly concerned with deciding the future prospects of a company and how it is going to perform from the presently available data. This is done by comparing the company with its competitors having similar products and lines of business, estimating the value of the company’s stock and comparing it with its current price.

Trading and Investing

There is a difference between trading and investing — trading is done exclusively for the short term, with the aim of generating profits through intraday trading or holding positions for a couple of days. Traders generally do not worry about the intrinsic value or the fundamentals of a company. They try to capture market trends or temporary mispricings of a stock. As the traders see it, the stock can follow one of three trends — uptrend, sideways or downtrend. The most important task for them is to recognize the period of sideways movement (no trend), since it is very difficult to make profits due to random fluctuations. After identifying the trend, traders rely upon technical indicators (like RSI & MACD) for making trades.

On the other hand, investors get into the game for the long run. They generally hold stocks for a minimum period of an year. They use fundamental indicators of a company to evaluate its actual profitability and buy the stock if they think the company has a good future, expecting the price of the stock to go up as the company grows. It involves analyzing the company’s annual reports, crunching profitability and efficiency ratios, reviewing the company’s management team and comparing the firm to its peers operating in the same sector. The billionaire investor Warren Buffet successfully used value investing throughout his career to identify undervalued stocks.

The Rise of Quants in Finance

A Quant is someone who just looks at the market numbers and not at company-specific annual reports. He will look at particular market variables and try to come up with a decision of whether to buy or sell, making it very mathematical and rule based.

There are 2 kinds of quants in the financial industry.

The first type will focus primarily on the pricing of shares, derivatives and creating structured products according to the client’s needs. The seller of these structured products has to take considerable risks since he is guaranteeing a fixed percentage return to the client according to some formula. Therefore, taking on these risks means actively trading to hedge what you sold to the client. The quantity of assets needed to be hedged is determined by these pricing models that a quant develops.

That is completely different than having a quant who is asked to come up with a model that predicts where the price of the stock/index will go. He has the data for all required variables. The latest developments in this field include the use of machine learning, deep learning and signal processing techniques in price/spread calculations.

Quants also try to capture some market trends using algorithmic codes, testing their profitability on historical price data. The efficient market theory says that a stock is priced at its fair value at any time in the market. Since markets do not function ideally, there are price irregularities (anomalies) in the market, which can be exploited using mathematical and statistical techniques. Quants try to capture a number of such anomalies and make money using this statistical arbitrage.

High Frequency Trading (HFT) is trading in which buying and selling takes place at a very rapid pace. If you buy something now and sell it 2 seconds later, all that you care about is whether the selling price is greater than the buying price. It goes against the conventional norm of markets in which fundamentals of the company count. Although bringing such technologies into the investing world has improved the domain by reducing volatility and increasing liquidity, the rather scary thing about it is the systematic risk that might be involved. Much of this trading takes place automatically and very quickly, the human element getting more and more divorced from the process.

Final Thoughts

The world of finance is highly competitive. Over the past decade, machine learning is increasingly being used across various sectors of finance. Hence, firms require people who have a technical background and a good knowledge base (basically, engineers).

And they pay well :)

So if you are an engineer, how do you break into Finance? Let us hear what our alumni have to say on the matter.

Testimonials of our Alumni

Here is the list of questions we had asked them -

• What motivated you to pursue finance?
• What problems did you face due to lack of finance culture at IIT Roorkee?
• What would be your advice to students who wish to explore or pursue a career in finance?

Harshdeep Singh Tuteja
Applied Mathematics, Batch of 2016
Quantitative Research Analyst at J.P Morgan

“I am a Quantitative Finance enthusiast. It all began with a competition organized by a quant asset management fund. After the competition, I was offered a role by the same company to make mathematical models based on statistical arbitrage to take positions in the stock market. What motivated me the most was the fact that this gave me a platform to bring my academic interests in Mathematics, Computer Science, and Finance to practical use, me being from Applied Mathematics background. Currently, I am working with the Quantitative research team of an Investment Bank. I work on pricing and risk management of Equity Derivative products. Personally, I am interested in applications of Machine Learning to Quantitative Finance, which although has challenges of its own, also has a lot of potential to make a difference.

It is very exciting to hear about the Finance club at IIT Roorkee. This can be a platform for people to explore their interests, discuss and share new ideas, or simply raise awareness on what’s new in Finance. I congratulate the team for this wonderful initiative.”

Khushal Jaiswal
Electrical Engineering, Batch of 2018
HSBC-Analyst

“It wasn’t a single event, rather, the interest was built over a period of time. A lot of factors were involved, some of them as silly as ‘Core mein nhi jaana’ and stuff like that and some of them were driven by the curiosity to know the cause and implications of the business events reported in news, but the habit of reading definitely played it’s part. Initially I would read whatever I could get my hands on, but later on I started to give it a direction (I still am not sure about the stream). But all said and done, every event in this mortal world can be linked to economics. The intricacies of the field captures the happenings of the world. It is probably the easiest, yet the most complicated field.

The initial journey was directionless, lack of a platform (club, if you will) made it really difficult to figure out what to read, how to proceed, what all would be useful in the market, what is the current stage of markets, what kind of skillset the industry is looking for and which career path is the best suited at this stage, and a lot more. Also, finding people with similar interest was a difficult task. After all, that is a requisite to learn, right? In summary, the lack of finance culture or rather a platform where the fin-heads could meet always bugged me. I sort of feel guilty for not making any effort to change that, but kudos to the team for taking an initiative. I am sure they would make something sustainable.

For the brains interested in pursuing a career in finance, I would say bang on! You are in for a ride. From the academics’ angle, initially focus on the qualitative as well the quantitative part. You should know the math as well the intuition behind it. Develop a habit of reading news, and that’s a non-negotiable necessity. Complete the course work that you start on a particular topic, don’t just keep switching topics in the name of exploring. Stay in the company of people that push you. Finance is an interesting field, just do it right. All the best. Adios.”

Chetan Maheshwari
CSE, Batch of 2018
Quantitative Analyst, iRageCapital Advisory

“1. It was the end of second year and I had just finished a course from the HSS department on Economics. During the summer vacation, I chanced upon a movie called Inside Job. It is a phenomenal movie that describes the Global Financial Crisis in detail. The integration of the world markets and the domino effect simply amazed me and the core of it all was Banking. ‘The Big Short’ was the next founding stone. It diverted my stringent attention to financial markets. Consequently, I spent the entire summer vacation reading about it and from there it all started. I read a few books by stalwarts and finance pioneers. And then I started doing courses on my own. I started appreciating finance like it was my calling and I guess I am happy about my decision that I took two years back.

2. Yes, if there had been a proper culture of finance or a club per se, things would have been much smoother. However, for me the lack of a finance culture at IIT Roorkee didn’t matter that much. I knew what I wanted to learn and I had a feeling that I could be really good at it. That was more than enough to motivate me. At times I did feel bad and disappointed, but I always acknowledged the fact that it is an institute for technology, so one cannot put the blame on the institute. In hindsight, an encouraging culture would have been definitely appreciated. From what I have seen, there are a lot of brilliant minds at IIT Roorkee who will do wonders in finance and they all will eventually get there.

3. So it has been two years since I have been reading, learning and working in finance. Have done around 8 courses in Finance- mostly on the Investment Banking side and on the Financial Markets side. I have done 2 internships — one in Equity Analysis and the other one in Forex Trading. I have done two projects, one of which was my B. Tech. project — a confluence between Data Science and Financial Markets. And currently I am working at iRage Capital as a Quantitative Analyst/Trader in the Options Market Making Team and I just love my job. The journey in finance has been promisingly fruitful so far.

So here are few suggestions for people willing to or already considering a career in finance -

1. The switch from engineering to finance is full of roadblocks, so you have to keep patience and just stay on course. Mathematics (especially stats and probability) is going to be your biggest strength. Use that knowledge smartly.

2. Finance is a lot about reading. Like reading about company structures, Mergers and acquisitions, business plans, markets, the economies and of course the geopolitical happenings around the globe. Markets react to everything. So you need to be better informed. Hence read as much as you can.

3. Also, don’t just read. Find and study the practical application of the major topics. Because, no one wants to know whether you know the Discounted Cash Flow Model. But people sure as hell want to know — ‘Do you know the valuation of Flipkart?!’

4. Follow the news — business as well as political.

5. Finance is a lot about networking. And since you come from a non-finance/non-commerce background, you are going to need all the help you can muster when you would be looking for job opportunities. Also, learn how to use LinkedIn.

6. Do projects and try to attend conferences. This is one thing where I missed out personally. Wouldn’t want you to miss it.

7. Finally finance is not for those who want a simple, relaxed and not-so-hectic life. It is one of the most demanding professions, because the stake is a lot of money. Seriously a lot. There’s an enormous amount of hard work and it will never be enough. So if you think you cannot toil that much, I think it might be a challenging road ahead for you.

All the best for your journey in Finance. Just remember — ‘Money is not 0everything but its right next to everything.”

We hope we could give you a better understanding of the various sectors of finance. For regular updates, please follow our facebook page.

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