Help me understand finance!

August 25, 2010 5:26 PM

What are the best resources for learning about financial markets, from a business perspective?

I'm a software developer who'll be starting work at a financial services company in a few weeks. I know software but I don't know much about finance - can you suggest some resources to help me learn? I'm sure I'll learn on the job, but I'd like to get a head start.

The company does automated trading for mutual funds, to manage portfolio risk. The users of the software are the fund managers.

I have some basic knowledge - I know what shares are, what a mutual fund is, what diversification is, and why diversification is important. I know what an index fund is, and I have a very vague understanding of options and futures. But that's pretty much where my knowledge ends. I've heard of these things called "alpha" and "beta" but I don't know what they are :).

Is this something I can learn from a good undergraduate textbook, or are there other good books or resources? Also, what is the proper name for this field of finance? "Financial markets"?

Thanks for your help! Of course a few weeks of studying won't make me an expert, but I'm sure it will help.

posted by problemspace to Work & Money (12 answers total)

There is so much good stuff in Mutant's profile that my socks are falling down. It is a great place to start.
posted by Admiral Haddock at 5:50 PM on August 25, 2010

Best answer: I do software for quant hedge fund. Id focus on 3 areas:

Technical side of what Im guessing your employer will have you working on - this is a pretty good introduction to managing execution costs for big portfolios.

For the "what people in the market think about" idea, I'd just make Seeking Alpha part of your daily reading. There is a lot of crap on there too, but the idea is not to glean all the facts but to just know what people are thinking about.

And as a basic basic, you cant go wrong with Security Analysis for the accounting-style fundamentals of what this stuff is all about, ie what the big econ stats are, psychology, whats "hot" and why etc.

Beta is generally an instruments volatilty relative to a benchmark (usually the SP500). Low volatile stocks have lower betas than high volatile stocks. You can see the beta on this page: YahooFinance key stats.

Alpha is generally the return beyond your benchmark. For mutual funds it can be considered to be what you return beyond the SP500. There are many benchmarks and ways to measure it, and the term is "overloaded" in OO speak. You can see that here for funds.


Feel free to mail me for anything else
posted by H. Roark at 5:52 PM on August 25, 2010

I did some wild copy/paste there - ", ie what the big econ stats are, psychology, whats "hot" and why etc." was supposed to be in reference to the seeking alpha page.
posted by H. Roark at 5:54 PM on August 25, 2010

Beta is performance you get because of some sort of risk you've taken. Alpha is performance you get because you out performed that which would be expected given the level of that risk you've taken. How you calculate beta is highly variable - and most people who claim to generate alpha really just find a different kind of beta.
posted by JPD at 6:06 PM on August 25, 2010

Best answer: Maybe I'm wrong, but once you get up the learning curve you might want to read Grinold & Kahn's "Active Portfolio Management". Personally I don't believe in optimizing portfolios but those are the guys who pretty much invented the concept back in the 70's when they helped found what is now the largest quant manager of mutual funds in the world. I'm not sure how much actual finance you need to understand it so I can't say you should pick it up now.
posted by JPD at 6:10 PM on August 25, 2010

Not sure meaning i've read it back in the days when I did believe in alpha, but can't remember off hand what you need to know going in. As a CS guy the math should be a joke.
posted by JPD at 6:22 PM on August 25, 2010

Best answer: If you'd like to start off with something roughly narrative-based that's easy to read in your spare time, Capital Ideas: The Improbable Origins of Modern Wall Street is quite good. Covers a lot of subjects and history, probably a good starting point before getting into specifics.
posted by ripley_ at 6:30 PM on August 25, 2010 [1 favorite]

If you'd like to start off with something roughly narrative-based that's easy to read in your spare time, Capital Ideas: The Improbable Origins of Modern Wall Street is quite good. Covers a lot of subjects and history, probably a good starting point before getting into specifics.

a great book for this purpose - it is pretty much specifically about quant equities - which is what you are doing.
posted by JPD at 6:35 PM on August 25, 2010

Response by poster: Thanks everyone! These are all great answers. I think I'll start with ripley_'s suggestion of Capital Ideas, since it sounds like an easy read.

H. Roark, I definitely want to read that algorithmic trading book... it sounds exactly like what the company is doing. And I'll start reading Seeking Alpha.

JPD, Active Portfolio Management also sounds really interesting - my university library has a copy, so I can check it out and find out if it's over my head...

And yeah Admiral Haddock, I've read some of Mutant's posts, though I haven't understood all of them - I should just spend an afternoon browsing through what he has to say...

Thanks again!
posted by problemspace at 7:18 PM on August 25, 2010

Honestly, Wikipedia did well for me starting out. I started on the main Finance article, and jumped off from there when I saw something interesting (like the Efficient-Market Hypothesis).

From there you start crafting portfolios with optimum risk/reward mix, delving into Modigliani-Miller theories of capital structure, and all sorts of fun business.
posted by smistephen at 7:27 PM on August 25, 2010

I'll do you one better than a textbook. Here's an entire Yale undergraduate course in Financial Markets. I found it to be a pretty lightweight course, but it's intended to run alongside a much mathier, unrecorded course. Still, you can watch the lectures, check the syllabus for reading materials, and amuse yourself with their homework assignments. It covers the history of options and futures, and their financial properties, along with plenty of other things.

I spent last winter break watching it, and it's pretty good, and recorded at an interesting point in time. During the class, an investment bank goes under, subprime starts affecting everyone, and ends with a pair of guest lectures from Larry Summers. Guest lectures are especially interesting when you do research on how they've fared recently. For example, the Whitebox fund manager talks about a partnership to buy an airline. Two months later they end that partnership and shortly thereafter said partner is convicted of running a ponzi scheme that would have been big news if not for the cover Madoff gave them. The Blackstone CEO gives a talk about "finding legal ways to create insider information". They went public like a month later and the stock price has yet to close above the IPO price. (You could say they chose about the best time to IPO as we'll see in years).
posted by pwnguin at 8:47 PM on August 25, 2010 [2 favorites]

Pwnguin - that Yale course looks amazing. Will certainly be watching the guest lectures.
posted by laukf at 1:57 AM on August 26, 2010