Many times young students, who are following the finance stream, are not really sure what they actually want to do in future.
They see their friends or seniors following successful high paying professions in equity research, private equity analyst, financial research, investment banking, hedge fund manager, etc.
Many times these youngsters are not sure what exactly they have to do if they choose any of the above professional careers.
In fact just last week one of my students from the financial stream had come over to me with the very same problem.
He wanted to understand equity research vs investment banking roles.
As this is a common question asked by many young finance students, I thought I would write an article on this subject which would help all these students.
So let’s start by understanding who exactly an equity research analyst is and who an investment banking analyst is.
In the role of an equity research analyst, you will be required to assess issues influencing key financial investment decisions such as the stock market performance, currency market positions, various industry performances, inflation rates, economic environment and other such factors.
You need to comprehend the various market dynamics to follow all the pertinent participants, from the biggest industry players to new and fresh start-ups in the market with a keen eye.
Equity research analyst is a person who will prepare financial reports on equity stocks and financial securities.
The research conducted by the equity research analyst helps the readers of the report to question, inspect, find or study truths, facts, principles and theories.
The report that an equity research analyst would prepare will typically include an analysis of equity stocks or securities of various organizations or various industries.
As an equity research analyst, your work would serve as a gauge for your clients who could be organizations or individual financial investors.
As an equity research analyst, you will have to evaluate the value of the organization and guide your clients or readers in taking profitable decisions after reviewing the market in detail.
As an equity research analyst, you will also appraise the impending revenue or financial potential of the organization.
To reiterate, an equity research analyst studies the market dynamics and the market participants along with the impending business environment, to write an equity research report which will help his clients or readers take calculated decisions which will get them optimal returns.
An investment banking analyst is a person who works in a financial organization or firm which is primarily in the business of raising finance or capital for organizations (large corporates as well as small start-ups), companies, associations, governments and other such bodies, or someone who would work in a big bank's unit which is involved in such financing activities.
Investment banking analysts could also deliver further services to their clients such as M&A advice (mergers and acquisition), guidance on specific financial dealings, such as an equity stake sales, private placements, IPO (initial public offers), spin-offs or corporate reorganizations.
An investment banking analyst will be required to accomplish comprehensive market research and financial due diligence on various industries and organizations he covers to formulate the background which will help to pitch for the business.
He will also have to do all-encompassing research on the organization he is pitching to - Including everything from collecting strategic as well as financial information from various company documents such as – 10K, 10Q, audited financial statements, balance sheets, etc.
You will be expected to work diligently with other team members and contribute to major phases of the deal execution procedure.
Finally, to reiterate, an investment banking analyst is a person who helps organizations, associations or governments in raising finance (equity or debt) by issuing or selling stock in the primary market.
He assists public and private corporations to raise finance in the financial markets, as well as offers strategic and financial advisory services for M&A (mergers and acquisitions), stake sales, IPOs and other kinds of financial dealings.
To be an effective and successful equity research analyst, you will need to have access to correct and reliable intelligence at correct and timely intervals.
You should also be in a position to be able to predict the future market moves.
It is vital for you as an equity research analyst to continually elevate yourself with the newest events in the market.
For this, it is imperative that you have good computer knowledge of various research techniques which will help you get easier admission to important and timely intelligence.
In my earlier article – ‘A Guide to Becoming a World-Class Equity Research Analyst’ I had explained that for becoming an equity research analyst, you should typically have a degree or a diploma in finance, business or accounting from a reputed university.
Further skill sets required to flourish in this equity research job, include good communication skills (both written as well as spoken), analytical mindset, decisive thinking, and excellent research skills.
If you can combine both – excellent communication and data analysis skills effectively, you can be very successful in this field.
Investment banking analysts are typically very well-paid professionals, but these spots necessitate specific financial skills, number-crunching abilities, expertise in financial modeling, private equity, capital markets research and investment banking, superb communication skills (both verbal and written), and the ability to work very elongated and gruelling hours.
One of the most significant skills that you will be expected to have is the profound knowledge of finance and money.
You have to display an understanding of what, how, and why a particular thing is happening or is going to happen.
As an analyst, you will have to be well-organized, hardworking, suave, responsible, detail-oriented, and ready to put in long hours.
Educational expectations typically comprise a post-graduation from a reputed university, an MBA (Master of Business Administration degree) from a top institution and/or the CFA degree (Chartered Financial Analyst).
As an equity analyst your work would typically include reviewing quarterly and annual financial statements (the balance sheet, the profit and loss statement, the cash flow statement, the notes to accounts, etc.), revenue figures and forthcoming projections, intelligence concerning important clients, the quantity of debt the organization is having, any lawful accountabilities, current market movements, and the products or services presented by the organization.
After reviewing all this in detail and scrutinizing the data, you will have to make crisp but comprehensive equity research reports, which will aid your clients in taking optimum decisions about their portfolios.
The bulk of your time will be consumed on research.
The remainder of your time will be spent on financial modeling and research report scripting.
It could require some time initially to create financial models in the first place but once you are done with it you just have to do small changes and revise it for new financial announcements and significant channel checks.
The most important document that you will be expected to create is pitch books.
Pitch books are marketing collaterals used to pitch for deals with probable customers.
They are mostly compiled using Microsoft PowerPoint software.
A pitch book would typically cover a detailed analysis of investment considerations and various key recommendations for the customers which will help them achieve their strategic targets.
A pitch book would generally consist of detailed analysis of the industry the organization works in, a S.W.O.T analysis (Strengths, Weaknesses, Opportunities and Threats) of the company, PESTLE (P - Political, E - Economic, S - Social, T - Technological, L - Legal and E - Environmental) analysis, various ‘comps’ (Comparable Company Analysis) where various ratios of competitors are compared to the ratios of the client, various recent trends, growth rates of the industry, opportunities for the company in the market, macro and microeconomic and organization-specific scrutiny.
It also includes intelligence on the Investment Banking team working on the transaction, profiles of key Investment Bankers, previous success stories and key techniques used by them (i.e. explanations as to why they should be appointed for the transaction!)
Other responsibilities of an investment banking analyst could comprise of attending corporate meetings with clients to deliberate on a specific transaction or strategy, going on roadshows with customers to discuss with Institutional Investors around the country or even abroad.
As an equity research person in the USA working in a top firm such as Merrill Lynch, Goldman Sachs, J.P. Morgan or Citi Bank, you could begin your career as a junior equity research person and then climb the ladder to become an equity analyst, then a senior equity research person than a VP (vice president), then a Head of Research, then a regional fund manager and finally the global fund manager.
Equity research firms are more like how asset management firms of hedge funds are organized where there is one senior person taking all the decisions while everybody else under him or her, are executing the orders or suggesting fresh thoughts.
Here you have a quasi-mid-level where you could possibly have a senior analyst and then research analysts, but it’s quite less hierarchical than how it is in Investment Banking.
Equity research is mostly about how good you can be at solving your client’s problems and coming up with new and more perceptive concepts.
As an investment banking analyst in the USA working in top investment banks such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, Morningstar, Value line or Bank of America Merrill Lynch, you could begin your career as a junior analyst and graduate to a senior analyst.
The typical hierarchy thereafter could be an analyst, then an associate, then a VP (vice president), then an SVP (senior vice president) or director and then a managing director.
Some investment banking firms diverge a little bit from this typical hierarchy, for example where they have the SVP (senior vice president) and director to be distinct roles.
Some other firms, especially non-American firms, have similar hierarchies but with somewhat diverse names for every position (director for vice president and ED (executive director) for SVP).
One difference for American firms is that leading investment banking firm Bear Stearns refers to the SVP (senior vice president) position an MD (managing director), and calls their managing directors as senior managing directors.
But really, irrespective of the designation definitions, the typical job functions of each position incline to be consistent across different firms.
Typically both investment banking analysts and equity research analysts would begin with similar base compensation.
However, bonuses in investment banking typically are around 25% higher than what an equity research role would get at the entry-level.
In fact, the variance in some countries could be even higher. There were some stories that bonuses at equity research firm Credit Suisse were around USD 5,000 this year.
In fact, investment banking jobs become even more rewarding as you go up the hierarchy.
If you look at it, the biggest difference equity research vs investment banking analyst is that mostly the investment banking analyst’s role is front end client facing while the role of the equity research is the back office.
Though equity research is considered to be the less glamorous cousin of investment banking, one cannot really say whether being an equity research role or an investment banking role is better.
Both the jobs are unique and high paying jobs with advantages and disadvantages.
You have to remember one thing that is to work very hard and give your more than 100% to whichever role you choose to target.
I hope this article has been useful in understanding equity research vs investment banking.
If you have any queries, please comment below.