The Advanced Guide to Equity Research Report Writing

 

Equity Research Report Guide

Why I Wrote This Guide

Equity Research is a rewarding career.

To keep up, you need a strong foundation with the judgment to think critically, act independently, and be relentlessly analytical.

That’s why I wrote this guide — to empower you with the equity research report writing skills to stay ahead in equity research career.

There is almost NO guide available that teaches you how to write equity research report. From textbooks to online video tutorials, you can check and let me know if you find one.

And, I felt that I should write a detailed and step-by-step guide— a guide that really starts at the beginning to equip already-intelligent analysts with a healthy balance of conceptual and practical advice.

The Advanced Guide to Equity Research Report Writing takes your writing to the next level.

Who This Guide Is for?

I wrote this guide for an audience of equity research analysts, investment banking professionals, industry analysts, market research professionals, business management students, and freelance writers.

Most of all, I want you to walk away from this guide feeling confident about your equity report writing skill.

How Much of This Guide Should You Read?

This guide is designed for you to read from the beginning to the end.
Each new chapter builds upon the previous one.
A core idea that I want to reinforce is that you need to know the framework to write the reports.
Reading this guide from start to finish will help you connect the many moving parts of report writing to your big-picture goal, which is equity research report writing skill.

Chapter 1. What Is an Equity Research Report

This chapter explains what exactly an equity research report is.

The questions like—Who makes it? Who reads and uses it? What are the different types of equity research reports?—are answered clearly and elaborately.

It briefly talks about the various key contents of an equity research report.

And lastly it explains the need to provide a disclaimer at the end of an equity research report.

So before understanding how to write an equity research report, let’s try to understand what exactly an equity research report is.

FINRA, the Financial Industry Regulatory Authority, defines an equity research report, in Rule 2711 (a)(8) as,

 “A written or electronic communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision.”

Readers of Equity Research, more so than anything else, identify trends that make investment decisions easier to justify.

In simpler words, an equity research is a document written and published by a brokerage house or securities firm for its clients to help them to take better decisions regarding which stocks to choose for profitable investment.

The report should be such that it should convince the client to take a decision.

The report should be crisp; the point of view should be clearly structured and articulated concisely.

In the investment industry, equity reports usually refer to ‘sell side’ research, or investment research created by brokerage houses.

Such research is circulated to the corporate and retail clients of the brokerage house that publishes it.

Research produced by the ‘buy side’, which includes mutual funds, pension funds and portfolio managers, is usually for internal use and is not distributed to outside parties.

a. Different types of equity reports

In the above paragraph we saw terms such as ‘sell-side’ and ‘buy-side’.

Let’s quickly understand what these terms mean:

There are two main types of equity research reports:

i. Sell-Side reports

Sell-side reports are the most common type of equity research reports in circulation.

They are normally produced by investment banks, typically for their clients to guide their investment decisions.

A sell-side analyst works for a brokerage firm or bank which manages individual clients and makes investment recommendations to them.

Sell-side analysts issue the often-heard recommendations of “buy”, “hold”, “neutral”, or “sell”.

Analyst Recommendation

These recommendations help clients take decisions to buy or sell stocks.

This is favorable for the brokerage firm as each time a client takes a decision to trade; the brokerage firm gets a commission on the transactions.

Click here to see some examples of sell-side reports

ii. Buy-Side reports

The ‘buy side’ reports are internal reports, produced for the bank itself, and are guided by differing perspectives and motivations.

A buy-side analyst generally works for a mutual fund or a pension fund company.

They perform research and make recommendations to the money managers of the fund that hires them.

Buy-side analysts will verify how promising an investment seems and how well it fits with the fund’s investment strategy. These recommendations are made exclusively for the benefit of the fund that employs them and are not available to anyone outside the fund.

Within the buy/sell group, there are other types of reports like initiating coverage reports, standard reports, Issue reports, Investor notes and sector reports.

iii. Initiating coverage reports

Initiating Coverage Report

 

The initiating coverage reports are conducted on firms that the bank has begun following and are typically more comprehensive in nature.

Initiating coverage reports analyze a company’s historical financial information, order books, efficiency, SWOT, cash-flows and future earning potential, basis which it estimates the future earnings of the company and its P/E multiples.

Click here to see some examples of initiating coverage reports

iv. Standard reports

After an initiating report is produced standard reports will follow for as long as the brokerage house continues to track the stock.

Stocks that are tracked are typically part of an index like the SENSEX, or are amongst the top stocks in an industry as these are the stocks that investors care about and are traded in larger volumes.

v. Issue reports

Quarterly Earnings Report

These reports are issued when generally companies announce earnings each quarter (Quarterly earnings reports).

vi. Investor notes

Investor's Note

These reports are published a few times in between for incremental information and news.

For example – an investor conference companies hold, a big M&A deal, or a major new product announcement from a competitor.

These are usually short-run updates and are typically just quantitative in nature.

vii. Sector reports

 

Sector report

 

A sector report is a document which evaluates a given industry and the companies involved in it.

It is often included as part of a business plan, and typically seeks to establish how one company can gain an advantage in an industry through detailed research on competition, products and customers.

Click here to see the sector report

b. Contents of an equity research report

Now that we have understood the different types of equity research reports, let’s try to see the contents of an equity research report.

An equity research report should not be more than 10 to 15 pages long and should be very crisp and concise.

It should give the reader a clear understanding of the opinion of the analyst writing the report.

An equity research report typically has the following contents:

1. Analyst opinion and summary

2. Key highlights of the company

3. A snap shot of the industry

4. Financial ratio analysis

5. Valuation analysis

6. Risk factors

7. Disclosure and rationale of rating

Usually most of the equity research reports have this information; however there is no hard and fast rule in which an equity research report should be written.

We will study in detail (with examples) how to write each of these segments of an equity research report in the forthcoming chapters.

c. Importance of Disclaimers in equity research report

 

Disclosures

 

As every equity research report is an investment document, and investors use it to take decisions for buying or selling securities based on it, it is important for the report to have certain disclaimers to show un-biasness of the analyst writing the report.

Some typical disclaimers are as follows:

· Every equity research report entirely reflects views and personal opinions of the analyst as on the date of publication

· The analyst does not have interest in the shares of the company

· Compensation of the analyst is not linked directly to any specific research recommendations contained in the report

Click here to see an example of disclaimers

Key Takeaways

  • Equity research report writing is a skill. You need to build this skill to go to the next level in your career. Top notch careers in finance–equity research, investment banking, asset management, financial research, Knowledge Process Outsourcing (KPO) units value this skill in high regard.
  • There are different types of research reports–sell-side, buy-side, initiating coverage, standard, issue, investor notes, and sector reports. As an analyst, you should know all these reports.
  • Contents of an equity research report include Analyst opinion and summary, Key highlights of the company,  A snap shot of the industry,Financial and ratio analysis, Valuation analysis, Risk factors, and Disclosure and rationale of rating. I’m going to cover all these sections in detail with examples in coming chapters.

Now You Try It

I hope you can see the potential of  equity research report writing skill for your career.

Yes, it takes hard work to create something great.

But with this skill you already know ahead of time that your hard work is going to pay off.

I want you to give the skill a try and let me know how it works for you.

If you have a question or thought, leave a comment below and I’ll get right to it.

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