Financial markets sustain on information.
Here, information is the prized asset.
The desire for information availability and consumption spurned a whole new industry, popularly known as Equity Research.
Well, to start with, equity research is the study of equities or stocks for the purpose of investments. Equity research is what an equity research analyst does. In simpler terms, equity research is the act of gathering information:
(1) information that helps investors to decide where to put in their money;
(2) information that traders require to understand whether to enter or exit a market position;
(3) information that financiers (bankers and firms) need to evaluate companies.
Equities or common stock comprises a big chunk in any company’s capital and shareholders need to know whether to stay invested in the company or sell the shares and come out. Both the buy-side and the sell-side companies invest in maintaining an equity research division. This research may also include bonds and commodities.
The function of the equity researcher is to present a detailed analysis of a company, enabling investors to make an informed decision.
The research report is used by investment banks and private equity firms to evaluate the company for IPO, LBO, mergers and others.
For an investment bank, the equity research segment produces revenue as buy-side firms pay the equity research team to delve into its records and analyse information.
As an individual, it is time-consuming to do equity research, that is, to study the company, its financial statements, products, management and take a decision about investment. Exactly for the same reason, there are people working in research companies whose job is to do equity research and recommend companies for investment.
The application of equity research varies. Primarily, equity research is used in the mutual funds industry, investment evaluation, merger and acquisition deals, financial publications and charitable endowments.
Purpose of Equity Research
As stated before, the purpose of equity research is to study companies, analyze financials and look at quantitative and qualitative aspects, helping investors of varying degrees to make an informed decision.
As the name suggests, ‘research’ plays the most important role here.
Over the years, research methods have changed but the sole intention of research remains the same.
The number of investors is booming and so is the need for exploring the nature of investments.
Investors wish to take calculated and informed decisions, and this is where the role of equity research begins.
The purpose of equity research and the researcher is manifold.
To begin with, one gathers and analyses industry data and financial models of a specific company or an industry.
It also involves understanding current market trends, both from the perspectives of macro economy and micro economy, and report findings. Since the equity research targets a specific audience, it is necessary to tailor the findings to the audience demand.
Further, adequate stress is laid on the accuracy of information. If investors take actions based on any kind of misinformation or misrepresentation, losses are tremendous and harmful to both the investor and the company. Therefore, equity analysts spend a considerable amount of time analyzing stocks and valuating estimates.
The Equity Research Process
There are multiple steps involved in the equity research process. Here they are:
#1. Economic Analysis: It is a systematic practice undertaken to determine the usability of available resources, comparison between two or more resources, accounting opportunity costs and measuring the scope or viability of an investment.
#2. Industry Analysis: It is a tool used for assessing current markets and understanding its complexities. Political, economic and market factors are reviewed to understand its influence over the development of the industry.
#3. Company Analysis: It is a series of activities undertaken to analyse the operations of a business, focusing on the cause and effect of decisions and how they are likely to benefit (or not) future investors.
#4. Financial Statement Analysis: The accounts of a company are evaluated to determine the financial soundness (or otherwise) of the company. Profit and loss statements and managerial practices are overseen to prepare an accurate financial statement.
#5. Financial and Valuation Modeling: This is the process of valuing the company and its assets.
#6. Report Writing: All the above processes culminate into the report writing stage where the equity analyst prepares an in-depth report accessible to relevant shareholders.
#7. Presentation or Recommendation: Based on the report, recommendations are made for the benefit of the company and its shareholders.
Equity Research Qualification, Skills and Pay Package
A degree in MBA, CA or CFA is essential to begin a career in research.
A person begins as an equity research associate and then moves on to become an analyst in the long-term.
Interning with good financial and investment companies while still completing the course gives a strong platform towards career building.
Among equity research skills, it is necessary to possess higher analytical abilities.
You need to have a strong understanding of accounts and financial fundamentals as most of the time, what you are doing are crunching numbers!
Apart from this, knowledge about global and local business is an added advantage.
You need to know about capital markets and how they function.
The equity analyst also needs to be a good communicator.
Since all the financial analysis needs to be presented in the form of reports and/or case studies, strong writing skills is a must.
Lastly, as an equity researcher, possessing correct judgment goes with the job.
The salary packages of equity researchers are good. They get base pay packages plus bonus.
In India, the salary package of entry level equity research analysts at low-end banks is around Rs. 4 lakh per annum and Rs. 20 lakh per annum at high-end banks.
Their US counterpart earn about 80,000 USD plus bonuses at the entry level.
Lastly, campus placements are one of the best ways to get recruited and start an awesome career in equity research.
If you are interested, check out this list of important books essential in equity market research and learn more on research courses.
Want to learn how to do equity research with complete advanced DCF analysis including mid-year discounts and stub periods and future share price analysis, sum-of-the-parts valuation, and liquidation valuation?