collageFinance may be where the money is, but is this business discipline also where you will find the most math requirements? While minimal math studies are required for all business majors, finance happens to be one of the most quantitative fields. To learn essential skills such as analyzing and assessing investment performance and financial planning for savings goals, you must acquire a solid foundation in mathematics. While you won’t need to learn complex advanced mathematical theories, you will need to develop strong analytical abilities and enough of a background in algebra, calculus and statistics to apply concepts of these math branches to the finance field.
A degree in financial mathematics and statistics offers the challenge of combining the study of financial analysis and economic theory with probability and statistics. The number of colleges and universities offering this degree is small but growing, as of 2012. Although the coursework is rigorous, graduating students face a number of potential career opportunities when they enter the job market. The skills obtained while pursuing this degree translate very well to professions in government, finance, marketing and even agriculture.
What is a finance major?
The term “finance” refers to the management of money. When you major in finance, you’ll generally explore topics like financial planning, banking, and investing, all while developing valuable job skills like problem-solving and communication.
In a finance major degree program, you study financial theories and how they apply in the business world to help companies and individuals make and manage money. You practice using mathematical concepts, statistics, and analytical tools to solve problems and make decisions. With a finance degree, you can prepare for a career as a financial planner, financial analyst, commercial banker, investment manager, and more.
How Finance Professionals Use Math
Math is an important part of the financial specialist occupations, but the focus of the math you will do as a finance professional is on practical applications of business concepts, not advanced theory. The United States Bureau of Labor Statistics (BLS) reports that math skills are important for financial analysts, financial examiners, personal financial advisors, budget analysts, cost analysts and many other business and finance careers.
Finance professionals apply math principles to different matters and in different ways. Financial planners must figure out an appropriate amount of money to invest in order to create a strong portfolio and calculate the performance of these investments. For analysts, one of the most math-focused tasks is appraising the value of financial assets. Financial examiners, who make sure banks and other financial institutions comply with regulations about risk and consumer lending practices, have to monitor balance sheets and reserves of available cash, the BLS reported. Cost estimators have to accurately factor all kinds of costs, from supplies to equipment to labor costs, into their calculations. Financial specialists in different job roles need the math and technology skills to use computer software, including database management software, financial analysis software and spreadsheets.
There are benefits of earning a “math-focused” business degree like finance rather than a general business degree, including better income potential and a lower rate of unemployment and underemployment, according to The Washington Post.
Math For Financial Analysts: What Do You Really Need?
/ Financial Analyst Career / By Noah
Finance is about money, and money requires math. However, most financial professionals only need basic knowledge in algebra and simple rules such as the order of operations to excel in their job. What’s most important is being fast with basic math, and having a critical mind to understand the three financial statements, as well as financial instruments such as debt.
What math do you need to be a financial analyst?
In short, financial analysts need to be comfortable working with percentages, basic statistics (i.e averages & standard deviation), exponents, and algebraic expressions that reach the complexity of sigma notation (∑) and mathematical roots (√). In addition, quick mental calculations are always a huge plus.
Don’t worry too much about them now since you won’t understand the formulas without the theory behind them, but for referential purposes, some common mathematical concepts in finance include:
- Net Present Value: NPV = ∑(CF/(1-r)ˆn), where CF is the net cash flows of each future period, r is the discount rate, and n is the number of periods.
- Loan Payments: LP = r*CP+r*OI, where IP is loan payment, r is the interest rate, CP is the current portion of the total principle amount due, and OI is any outstanding interest to be paid. This formula varies by loan type, as some loan types, such as accrued loans, do not charge interest on out standing interest
- Remaining Principle: RP = TP – CP, where RP is remaining principle, TP is total principle remaining, and CP is current portion of the total principle amount due.
- Cost of Capital: E(Ri) = Rf + βi * [E(Rm) – Rf], where E(Ri) is the expected return on asset i, Rf is the risk-free rate of return, βi is the beta of asset i, and E(Rm) is the expected market return.
- Ratios: target metric/global metric, where the target metric is a number from the financial statements and the global metric is a big number from the financial statements, like revenue. Examples of financial ratios include net profit margin, which is net profit/revenue.
As you can see, the math itself is not difficult — it’s just basic algebra. The more challenging part is understanding the concepts behind these calculations, and how to identify and apply them quickly. But don’t worry, nobody knows how to do this coming out of school. It just takes practice.
That said, we can explore the mathematical skills needed by type of financial analyst, which we will explore next.
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Math Needed for Each Type of Financial Analyst
We can break down Financial Analyst Roles into corporate types and investment banking types. I spoke with 2 corporate analysts and 3 financial analysts to find out what math skills they estimate most important for each role.
Not surprisingly, they mentioned the same overarching ideas. All but 1 of the 5 listed skills that were not strictly math related, so I’ve excluded those as they’re outside the scope of this article. All 5 mentioned was the importance of Microsoft Excel as a crucial tool in their arsenal.
Note: if you’re deciding which to become, another element to consider for these roles is stress.
Corporate Financial Analysts
Corporate financial analysts need to be good with the following math skills:
- Financial statements ratio analysis
- Valuation techniques such as NPV and DCF
- Percentages
- Multiplication, division, addition, subtraction
- Basic statistics
- Basic probability
- Mental math
- Sanity checks and intuition
Financial Analysts in Investment Banks
- Ratio analysis
- NPV and DCF
- Percentages
- Multiplication, division, addition, subtraction
- Basic statistics
- Basic probability
- Mental math
- Sanity checks and intuition
The last point for both analysts is sanity checks and intuition. A sanity check is the application of intuitive reference points to results to check if your results are “sane.” For example, after you crunch down and map out a huge general ledger into an income statement (aka P&L), you should intuitively see if the net profit and revenue “make sense.”
Sanity checks are more and more important in a finance world that increasingly revolves around big data. Financial analysts are no longer expected to manage only accounting data and other strictly-financial data, but also commercial data that comes from digitized transaction recognition. Any online shop, for example, tracks transactions as they occur, although accountants only record the data when they manually review and input it into the company’s general ledger.
When financial analysts crunch millions of lines of commercial transaction data, they need to be highly skilled at intuitively estimating if that data makes sense with sanity checks.
Microsoft Excel for Math is an Analyst’s Best Friend
As we’ve explored briefly, math is not the most challenging aspect of a financial analyst’s role. The more difficult aspect is the logic and theory behind financial statements and different instruments, such as debt.
A large part of the reason why calculations themselves are not a challenge is the efficiency and ubiquity of Microsoft Excel in financial fields.
Excel allows you to make quick calculations with a high degree of accuracy and create models to explore the impact of multiple variables on a set of complex mathematical relationships. For example, you can easily and with great precision model a loan amortization schedule.
For many traditional financial calculations, which are very complex by hand, Excel has built-in formulas and reverse-engineering functions to help you get results fast. For example, Excel’s PMT() function allows you to rapidly calculate a traditional mortgage loan payment based on the interest rate, the number of payment periods, and the present value of the principle amount. Personally, I have tried to do this manually for the heck of it. It is possible, but very difficult.
Another example is Excel’s “What if” functions. The Goal Seek function, for example, allows you to set up a complex set of relationships, such as the calculation of a net salary based on social security contribution and a marginal tax rate, then simply reverse-engineer the calculation to find out what gross salary an employee needs to make to achieve a desired net salary.
This may sound complicated — don’t worry. The point here is that Excel is a financial analyst’s best friend. It’s flexible, accurate, and ubiquitous.
Math in Finance: Financial Mathematics
We’ve discussed math for finance as separate from the logic and theory behind financial statements and financial instruments, but there is a special branch of mathematics called financial mathematics that explores these topics in depth. It uses advanced mathematical processes to solve financial problems.
Examples of advanced math include:
- Probability,
- Statistics,
- Stochastic processes, and
- Economic theory
However, financial mathematics is more of an academic discipline than an industry skillset. While many financial institutions — especially investment banks — have Research & Development departments to deep dive into these topics, they are not needed in standard financial analyst roles.
Quantitative Finance vs. Finance
The difference between quantitative finance and “normal” finance is akin to the difference between R&D departments and client-facing roles in an investment bank.
Quantitative finance uses financial mathematics within a firm, whereas “normal” finance employs algebraic expressions and order of operations to make quick decisions on the client-side.
Obviously the R&D departments are looking for new opportunities on the financial markets, which means they need to pioneer new methodologies for calculating age-old probability problems to make decisions. These teams, thus, usually consist of profiles with PHDs in mathematical fields.
On the other hand, traditional financial analysts don’t need to reinvent the wheel. They just need to make quick, accurate decisions that generate money for the firm or company as soon as possible.
Finance Careers
A career on Wall Street is definitely a possibility for the graduate with a degree in financial math and statistics. Brokerage firms, banks and insurance companies all need individuals who can analyze data, compile forecasts and research financial trends. Graduates with this degree bring with them the statistical knowledge to build risk-forecast models, which allow firms to analyze future investments. This knowledge is also helpful in insurance companies that need statistical information to better design health-care and insurance policies. Additional courses in risk management may help an individual break into these careers.
Government Careers
All facets of government employ individuals with a background in finance and statistics. Local governments need individuals to budget and utilize city revenues properly and efficiently. At the federal level, graduates may find employment with the Internal Revenue Service, congressional committees and the Federal Reserve. Government jobs are in high demand; begin networking and monitor job websites if you’d like to obtain one of these coveted positions.
Marketing Careers
Market researchers conduct focus groups, carry out surveys and utilize test markets to collect data. Individuals with degrees in statistics and mathematics are sought out to analyze such marketing data. Job applicants with a major in financial mathematics and statistics offer the ability to bring not only knowledge of how to quantify the data, but also how this data translates into financial information that can help a company make sound decisions.
Other Careers
A degree in financial math and statistics should not mean that you are automatically required to dress in a business suit and work on Wall Street. Other career paths allow you to use your skills outside of the traditional office setting. The field of agriculture needs statisticians to help analyze plant and animal experiments, as well as to interpret the data. Graduates may obtain a master’s degree and a Ph.D. to pursue a career in teaching or research at the university level.
As a college graduate with a major in math, your superior analytical skills and advanced problem-solving practices may easily lead to a highly desirable career. Seek out companies and agencies who hire investment analysts, statisticians and actuaries. Some of these jobs require strong people skills and involve daily interaction with clients, coworkers and analysts. Others involve mostly analytical, solitary work. Take stock of your interests and career goals, then choose a profession that is best suited to your personality and mathematical skill sets.
Statistics
If you enjoy using mathematical principles and statistics to analyze patterns of behavior, a job as a statistician might be right for you. Some statisticians use data to perform market research, while others use information to compute insurance rates. Insurance-rate statisticians are commonly known as actuaries. Private businesses and government agencies often hire math majors who have completed detailed coursework in statistics to analyze surveys, opinion polls and census data, then create profiles to define human behavior. If the analytical aspect of mathematics, including theoretical studies, interests you most, a career as a statistician may put your skill sets and expertise to the test.
Finance
Consider a job in finance if the high-profile demands of Wall Street and the financial needs of investors stir your passion for math. According to the Duke University Department of Mathematics, investment and financial firms consider mathematicians to be prized hires. Because of the relative unpredictability of the stock market and other investment opportunities, many investment and financial firms want to hire mathematicians to assess the possibility of future gains or losses. Graduates with math majors are often required to assess future growth based on previous circumstances and economic factors; create and utilize math computer models to analyze financial information; and create scenarios to analyze financial possibilities. Mathematical jobs in finance are often rewarding, but they can be stressful if predictions don’t come to pass.
Cryptography
Cryptography is the making and breaking of secret codes, frequently used by government spy agencies and private businesses. For example, cable TV companies use codes to create services, so viewers have to buy or rent their decoding devices to get reception. Banks use cryptography to protect customers’ private information and bank account balances from computer hackers and unscrupulous employees. Number theory is the branch of pure mathematics which provides theoretical underpinnings for the development and advancement of cryptography.
Teaching
Teaching math to elementary children, secondary students and college students is a way to use your math major and give back to your community. Math teachers help students learn how to perform basic and advanced mathematical computations, apply formulas to create and interpret data, and analyze statistical information. If you decide to further your education and obtain a master’s degree or Ph.D. in mathematics, you might choose to get a job as a university professor. As a professor, you can also oversee or participate in math-oriented research to study how math relates to the medical industry, business, biotechnical developments and computer science.
Statistics is the scientific study of data organization to provide specific information and for measuring and determining uncertainty and probability. The discipline can apply to solving problems in economics, engineering, education, biology and sports. The American Statistical Association, or ASA, describes jobs that use statistics as exciting, flexible, rewarding and lucrative.
Everyday uses of statistics include sports information for baseball players, calculations for car insurance premiums and analyses of business efficiency. A bachelor’s degree in statistics or mathematics is the minimum education requirement for such positions, according to the Bureau of Labor Statistics. Jobs involving statistics can be roughly divided into three areas that offer attractive career opportunities in statistics.
Data Scientists and Meteorologists
Statisticians and data scientists are among the careers most often associated with statistical analysis. They analyze and interpret numerical data to formulate conclusions. Some specialize in such areas as biostatistics and environmental statistics.
Bioinformatic specialists apply statistics to biological information to develop new drugs and ways of manipulating genes. Meteorologists and climate scientists estimate the probability that weather events will occur. Most positions in data science and statistics require at least a master’s degree. Those interested in research and teaching need a Ph.D.
Business Analysts
Statistics can help businesses operate more efficiently and profitably. Industries that use probability calculations desire to know the statistical likelihood of certain events to set premiums and compensation. For example, actuaries use statistics in that way and work primarily for insurance companies that try to balance claim payouts with profitability.
Operations research analysts use statistics to identify and define business issues. They work in logistics, sales or production to create practical solutions, reports the Bureau of Labor Statistics. Financial engineering combines financial theory, engineering methods, programming and statistical tools to solve problems in finance.
The use of statistics in the sports business is well-known to followers of professional teams. Statistical information describes how individuals have performed in one or more games, and how likely they are to contribute to winning seasons. These numbers, in turn, determine their value and salaries. While a master’s degree is desirable in business statistics, those with bachelor’s degrees can find entry-level positions.
Teachers and Government Workers
Postsecondary teachers of subjects related to statistics train a new generation to use the field in the working world. They typically require a Ph.D., though a master’s degree may be sufficient at community colleges. High school teachers of math and statistics require a bachelor’s degree.
Government agencies use statistics to measure such varied information as the economic progress of the country, the number of females born in a particular state, the number of employees with a specific occupation, and the likelihood that a particular crop will fail due to poor weather. Managers and researchers in these agencies typically require master’s degrees and Ph.D.’s, respectively. Workers who simply gather statistics, such as census takers, may only have a high school diploma.
Salaries for Jobs Involving Statistics
Salaries for statistics jobs vary primarily by job title and level of education. Actuaries showed one of the highest median salaries at $108,350 per year, as of May 2019, according to the U.S. Bureau of Labor Statistics, while statisticians earned less at an annual salary of $91,160.
Atmospheric scientists, which includes meteorologists and climatologists, made a median annual salary of $95,380, while mathematicians earned $105,030. The median salaries of postsecondary teachers were often the lowest for any statistical field. College instructors of business earned $87,200 yearly; mathematics granted $73,690 per year, economics showed a median salary of $85,180 annually, and computer science was at $80,460 per year.
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