Pathways to Finance - What is Finance? Part 2
Roni's guide to finding your pathway into finance.
Swiftly moving over to part 2 of this blog, I will unpack a few more different areas of finance. The first blog covered the main, most popular areas of finance where most students aspire to work for a few reasons;
Prestige
Pay + Bonuses
The areas we cover in this blog are less saturated with LSE Economists (hurray for the rest of us), meaning they are not as mentioned but they still play very crucial roles in the financial services sector.
Insurance
Insurance is a sector that provides a mechanism for individuals and businesses to transfer and mitigate risks. This is done by essentially pooling (combining) risks from multiple policyholders, where each policyholder pays a premium in exchange for coverage against specific risks.
There a different types of insurance;
Life insurance - Provides a death benefit to beneficiaries in the event of the policyholder's death. Some life insurance policies also offer investment components.
Property insurance - Protects against damage to property (e.g., home, car) and liability for injuries or damage caused to others.
Commercial insurance - Provides coverage for businesses, including property insurance, liability insurance, and business interruption insurance.
Ego insurance - insures your ego against damages when speaking to GS investment bankers. This one is more risky as there are no guarantees of coverage for any emotional damage.
There are also some more specific functions of insurance;
Underwriting - Underwriting is the process by which insurance companies evaluate the risks associated with insuring an entity. Underwriters assess factors such as the insured's health, lifestyle, and property condition to determine the appropriate premium and coverage.
Reinsurance - Reinsurance is a process by which insurance companies transfer a portion of their risks to other insurers (reinsurers). Reinsurance helps insurance companies manage their exposure to large losses and maintain financial stability.
Some insurance firms are;
Allianz Global Assistance
Zurich Insurance Group
(not relevant to the UK but funny as f*ck)
FinTech
Fintech, short for financial technology, refers to the use of technology to deliver financial services in innovative and efficient ways. Fintech companies leverage digital technologies to enhance various aspects of financial services, disrupting traditional banking and financial institutions. The aim is to provide more accessible, cost-effective, and user-friendly financial solutions.
FinTech is a sector within financial services that is growing exponentially, and with its growth, it should be a sector that us aspiring students should look to explore.
Key components of Fintech;
Blockchain*1 and Cryptocurrencies - Blockchain technology, the underlying technology of cryptocurrencies like Bitcoin, is used for secure and transparent financial transactions.
Online Lending (Peer-to-Peer Lending) - Fintech lending platforms connect borrowers directly with lenders, cutting out traditional financial institutions. This allows for faster loan approval and disbursement processes.
Digital Banks (NeoBanks) - Digital-only banks operate without physical branches, providing banking services through mobile apps and online platforms. They often offer lower fees and more user-friendly interfaces. (Revolut, Monzo, Starling…)
Crowdfunding*2 - Fintech platforms enable crowdfunding for businesses, startups, and projects. This includes equity crowdfunding and peer-to-peer lending.
Fintech has disrupted traditional financial services by introducing more agile and customer-centric approaches. The fintech ecosystem continues to evolve rapidly, with ongoing advancements in technology shaping the future of financial services.
Examples of fintech companies;
Coinbase - A popular cryptocurrency exchange that allows users to buy, sell, and manage various cryptocurrencies.
LendingClub - A peer-to-peer lending platform that connects borrowers with investors, facilitating personal and business loans.
Kickstarter - A crowdfunding platform that allows creators to raise funds for creative projects by offering rewards to backers.
(insert abstract file to make blockchains look so cool and metaphysical)
Quantitative Finance
Quantitative finance is a field of finance that uses mathematical models and statistical techniques to analyse financial markets, manage risks, and make informed investment decisions.
It involves the application of quantitative methods to understand and solve complex financial problems, often with a focus on data analysis and mathematical modelling. (Math geeks control your urges, it’s a child-friendly blog)
Key components of quantitative finance include;
Mathematical models - Quantitative analysts (quants) use mathematical models to represent and analyse financial instruments and markets. These models can range from simple statistical models to complex algorithms.
Statistical models - Statistical techniques are applied to historical financial data to identify patterns, correlations, and trends. This analysis helps quants make predictions and develop models for forecasting future market movements.
Algorithmic trading - Quantitative finance is integral to algorithmic trading, where computer algorithms execute trades based on predefined rules. Quants design and implement these algorithms to capitalise on market inefficiencies or execute trades at optimal prices.
Examples of Quantitative Finance;
Black-Scholes-Merton Model (Derivatives Pricing): A mathematical model used for pricing European-style options. It provides a formula to calculate the theoretical price of options based on factors like the current stock price, time to expiration, volatility, and risk-free interest rate.
Pairs Trading (Algorithmic Trading): Involves using statistical techniques to identify pairs of securities with historically correlated prices. Algorithms then execute trades based on deviations from historical price relationships.
Modern Portfolio Theory (Portfolio Optimisation): MPT uses quantitative techniques to construct diversified portfolios that aim to maximize returns for a given level of risk.
Examples of Quantitative Finance firms;
Renaissance Technologies
Two Sigma Investments
DE Shaw & Co.
(your average quant worker)
And that wraps up my take on the different sectors of finance. The world of finance is much deeper than what I have covered in my two blogs, but I hope the sectors that I did cover helped you gain a surface-level understanding of what finance looks like.
Tune in to my next blog where I write about the different journeys into finance, covering spring weeks, internships, and much more.
In very simple terms, a blockchain is a digital record-keeping system that is designed to be secure, transparent, and resistant to modification. It consists of a chain of blocks, where each block contains a list of transactions.
In very simple terms, crowdfunding is a way for people to raise money for a project or idea by collecting small contributions from a large number of individuals. Examples include Kickstarter and GoFundMe.
He did it again! I what a great read🔥
Very informative!! 👏👏