Statistics can be explained as the science behind the process of identification, collection, organizing and summarizing, analyzing, interpretation, and finally the presentation of such data, either qualitative or quantitative, which helps in making better and effective decisions. In other words, it refers to data and the method of collecting the data, in a systematic manner, to analyze and interpret the data and ultimately present it to the relevant authority.
It is used in and by various sectors and verticals such as science, government, manufacturing, humans, population, psychology, astrology, business, industry, finance, banking, financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces., and so on. Statistics, in finance terms, means and includes data, in a numerical format, pertaining to individual or company financial portfolio, investments, group of portfolio or investments, or sector or market, giving details of historical data, present data, or forecast for future times based on the information and requirement, which is then interpreted and analyzed using mathematical formulas.
Role of Statistics in Finance
- In the finance sector, statistics play a very important role in the business decision making aspect.
- On a macro level, they help understand a country’s state of finance and what and how it is going.
- On the other hand, on a micro-level, it helps the financial analysts, internal or external, to the business or organization regarding the income earnings and revenue-generating capacity of the company.
- In either case, They help in preparing budgets, forecasts, monitoring company or country performance, effecting any policies as may be required. It is also used for preparing various kinds of reports for presentation to authorities, economists, stakeholders, or investors.
Example of Statistics
- Lets’ take an example of PNU Productions engaged in the production and manufacture of fashion clothes for kids. Now, the company is planning to expand into a new line of business for producing fashion garments for women. Before going ahead with its expansion plan, PNU Productions decides to prepare a projection/forecast regarding the expected expenditure to be incurred and expected revenue earning capacity.
- It undertakes an evaluation of the numbers, expected sales, calculates his return on additional investment being considered, analyses the same along with market and consumer preferences and expectation based on sample numbers and thus arrive at a conclusion regarding the expansion plan.
- This beforehand analysis with respect to financial statistics will help the company in making an effective decision for the business. Remember, when you see the reports, it is mostly in numerical form and prepared in such a manner that it is explainable by simply having a glance at it.
- Uniform set of data being used for the purpose of evaluation.
- In case of deviation of information available from sample data viz a viz the overall data, the same can be analyzed and interpreted using certain formulas.
- Data is collected using a set base of parameters in order to ensure consistency.
- It shall be understood to be sufficient to represent complete information about the full range of data.
- The numerical form helps in ease of understanding and interpretation.
- Purely based on parameters and mechanism, with no adjustment to be done, makes it unbiased and reliable.
Types of Statistics
#1 – Descriptive
Descriptive, as the term depicts, means explanatory. As a type of statistic, They refer to mean that data shows the basic aspects of the selected population and the manner in which it is organized and presented. The data can be analyzed by simply having to look at the information provided and the manner in which it is arranged. Descriptive statistics can be of either type – Tendency descriptive or Spread Descriptive.
- Tendency Descriptive: Uses simple mathematical calculations and can be analyzed by calculating the mean, median, and mode for the data under consideration.
- Spread Descriptive: Refers to how the different sets of data are or are not relative to each other. Generally, it includes a description by way of using variances, deviation methods, the range of data, the distribution, etc.
#2 – Inferential
It means arriving at a conclusion basis some evidence based on some sample evaluation. They can be of either type – Confidence interval inferential or Hypothesis Inferential statistics.
- Confidence Interval Inferential: Refers to statistics drawn from data with real numbers. However, the parameter with respect to its actual data size may not be known.
- Hypothesis Inferential: This means analyzing data based on a small sample sizeSample SizeThe sample size formula depicts the relevant population range on which an experiment or survey is conducted. It is measured using the population size, the critical value of normal distribution at the required confidence level, sample proportion and margin of error. for large data.
Applications of Statistics in Finance
Financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. apply and use statistics for various reasons. For that matter, lets’ take an example of a bank, which runs its operation on the knowledge that not all the depositors would be withdrawing all their deposits on a single day. Thus, leaving them with funds to lend to others and earns interest on that.
Organizations may use financial statistics to prepare financial forecasts and help them with budget models for future years from an auditing angle; it may help the auditor to use sample to observe and interpret for a particular ledgerLedgerLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. or account and thus use the analyze whether proper controls are in place multi-national companies may use financial statistics to depict the expected results of the company in a particular period and accordingly plan ahead.
Be it any business, banks, institution, individuals, economy, administration, anything; statistics play a very important role when one needs to make efficient decisions. Relying on statistical research, an efficient decision can be made by using the collated information, summarized information to analyze and interpret the data for the required purposes. Also, it is pertinent to note that the manner of presentation of such statistics is equally important in aiding interpretation and usage of such statistical information.
This has been a guide to Statistics and its meaning. Here we discuss an example and types (Descriptive & Inferential) of statistics with their role, properties, and applications in Finance. You may also have a look at related articles on finance –