Make use of this guide and excel as an equity research analyst.
1. Profiling an Equity Research Analyst
a. Who is an equity analyst?
An equity analyst is someone who studies and analyzes financial information and trends for an organization or an industry.
An equity research analyst reviews stocks, bonds, and other financial instruments and writes an unbiased, honest equity research report.
He studies public records of companies to forecast the organization’s impending financial needs.
He writes reports on the organization’s finances and defines the business’s investment potential by giving financial ratings, like buy, sell, or hold.
He is also accountable for analyzing the financial budget and making a strategy to get out of debt, if the organization is in a poor financial state.
He typically uses technical analysis or fundamental analysis to report, which securities or stocks are expected to be profitable and which are not.
In conclusion, he helps his clients in taking good investment decisions based on his equity reports.
b. What work do you have to do?
As an equity analyst, your work would typically include reviewing of the annual statements (the balance sheet, the profit and loss statement, the cash flow statement, the notes to accounts, etc.), revenue figures and future projections, intelligence concerning key clients, amount of debt the company is carrying, any legal liabilities, present market trends, and the products or services presented by the firm.
After studying all this in detail and analyzing the data, you will have to prepare a crisp but detailed equity research report, which will help your clients take optimal decisions about their investments.
The majority of your time will be spent on research. The rest of your time will spent on modelling and report writing.
It might take some time upfront to build financial models in the first place but once you are done with it you just make minor tweaks and appraise it for earnings announcements and significant channel checks.
In a typical hedge fund or asset management firm you have 1 head person taking the decisions and everyone else below him/her implementing and trying to come up with different ideas.
There is a quasi-mid-level where you could have senior analysts and then just analysts, but it’s much less categorized than say, Investment Banking.
Equity research is more about how good you are at servicing clients and giving insightful ideas – here we don’t need an assembly of people as you do with Mergers & Acquisitions deals. There are usually 2 – 3 Associates and 1 Senior Analyst on each sector/industry team – so if we’re covering 20 companies, each associate might be covering about 5 companies.
c. Where can you work?
As an equity analyst you would typically work in a brokerage house, securities firms, equity research firm or security investment firms, commercial or retail banks, NBFCs (non-banking financial corporation), insurance companies, mutual fund companies, pension fund companies, or other such financial companies.
As an equity research analyst you will have to work on both the sell side as well as the buy side.
As a sell-side analyst you will typically work at an investment bank or with an independent research company, whereas as a buy side researcher you typically will be working with hedge fund companies or financial management companies.
On the sell side, your research will be motivated by stock or share performance and you will have to develop cash-flow models and earnings of the organizations you follow in a particular sector or industry.
On the buy side, you will most likely follow some 20 to 25 organizations in two to three industries or sectors. Here, you will have to focus more on providing relevant intelligence to various portfolio managers who take care of investments for the client.
Equity research analysts can find jobs through professional recruiters or job consultants who typically specialize in recruiting in the financial industry.
Job bulletins and classified advertisements are supplementary methods for finding appropriate jobs in this field.
What prospective employers really seek is for your intangible skill sets to be made tangible. This realization should empower you significantly, because with this framework, you can concentrate on giving concrete proof that you have the skill set required for being an effective and good analyst.
d. How to give good interview and get a job
When applying for jobs with these firms, remember that while covering letters for your resume might be just a procedure for some other jobs, here they're a reflection of your writing abilities. Don't underestimate the importance the company’s Human Resources will give to them.
In addition to the standard Human Resources generated interview questions, be ready to speak about stocks you like and explain why you like them.
Frankly speaking remember one important thing - The stocks you choose don’t matter as much as the thought process behind the choice, and what explanation you provide. You will have to be able to portray a stock in a way that validates sound thinking and effective thought process. After all, your prospective job revolves around which stocks you choose to pick and talk about.
Also, be prepared to talk about your opinions on the capital and financial markets and related current topics.
Remember to have a view in everything you say but do not be indecisive, and don’t act like a ‘know-it-all’ either.
Organizations are also looking for those candidates with rational curiosity: people who want to understand every minute detail about an organization or industry and the implications on their customer’s portfolios.
e. How much can you earn?
The average emolument for a typical equity research analyst in the USA is around USD 70,000 to 100,000, while the top equity research analysts can earn more than USD 160,000 a year, according to the U.S. BLS (Bureau of Labour Statistics). These numbers include only salary, and not bonuses, benefits or perks.
Bonuses usually depend on how profitable your company or your team was during the year, plus some performance element measuring how well your stock-picks did for the year.
Ranges of base salary can vary widely from company to company, but the average bonus in a typical year is in the range of 25% to 50% of base.
When it comes to overall earnings an entry level equity research analyst or associate can earn anywhere from USD 80,000 and USD 250,000. Senior employees such as vice presidents or senior managers can make somewhere in the range of USD 500,000 to USD 750,000, while very senior people like partners or managing directors can make anywhere between USD 800,000 to USD 1.5 million. Star analysts have been known to take home literally USD 3 million or USD 4 million a year based on their success.
f. How much can you grow?
Advancement typically comes when you leave to join another organization and they promote you, or when you leave to go start your own firm.
Senior Analysts have cosy jobs and few leave readily – but if you do happen to leave and you’re well-respected in the industry, you might get an opportunity to cover your own names. And if you are able to build a good standing among investors, someone else might just hire you – whether it’s another hedge fund or a bank.
Many times analysts have a difficult time progressing as they tend to bury themselves in Excel sheet all day long– but that’s not the correct approach as no one cares how fancy or elaborate your model is.
Your clients will only care about how insightful your thoughts and suggestions are and how much they understand, like, and trust you.
So you need to get out of the bubble and go out in the industry to meet real people, shape up a reputation, and make worthy decisions if you want to advance in this segment.
2. How to Become a World-Class Equity Research Analyst
a. Skill sets required to become an equity analyst:
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 career 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.
ii. Extra courses (Professional certificates)
Apart from your formal education, it is always a good idea to explore other avenues where in you can enhance your technical knowledge.
There are various additional professional training courses where you can attend either classroom sessions or virtual classrooms where you can hone your equity research skills and learn various new techniques.
Most of these training courses cover the basics of equity research report writing such as - assessing industry attractiveness, financial modelling, equity valuation techniques, and equity and investment report writing.
Professional certification will seriously increase your chances of getting employment as an equity analyst after completing a formal graduate degree program. There are institutes such as the CFA Institute offers the Chartered Financial Analyst credential to contenders who meet the educational necessities and pass three exams. The exams cover financial markets, financial accounting, securities analysis, economics, portfolio management, corporate finance and asset valuation.
Apart from formal education and extra courses, a very important aspect of your learning will be ‘On the job’ training.
You will almost immediately find yourself interacting with portfolio managers, hedge fund managers, the company’s internal salespeople and traders, as well as communicating the senior analyst’s investment theory after the organization reports its financials.
Important thing is to keep your eyes and ears open and absorb as much as possible.
A formal graduate degree program might provide the candidate with a chance to complete an internship with a professional investment firm or financial business.
These internship programs offer the candidates with ‘hands on’ guidance in the financial sector and particularly equity analysis.
Employers when making recruitment decisions for financial or equity research jobs definitely prefer internship experience in other companies.
A good and successful internship stint can give a lot of ‘on the job experience’ and confidence to fresh analysts and can lead to good employment opportunities after finishing their formal MBA program.
This is also why those without any kind of experience in the financial industry find it difficult to get hired for research analyst jobs.
I would really insist that all beginners (with no financial market experience) should always try to seek internships with good and reputed financial organizations where they can learn new skills and also hone their existing skills.
iv. Understanding of the industry and economy
As an equity research analyst, you will have to continually identify and analyze financial information, strategic issues and trends that affect companies, industries and markets on a local and universal scale.
You will have to analyze macro factors, various sectors or industries as well as the organizations’ financial results to recognize investment opportunities. These insights and investment ideas will be used by the readers of your report to develop their strategies and take investment decisions.
Since equity research analysts typically focus on a small set of stocks (5-20) within select industries or geographic regions, they become specialists in those specific companies and industries that they evaluate or follow.
Analysts need to comprehend everything about their ‘coverage land’ to give investment endorsements. Equity research analysts must be conversant with the business regulations and regime policies within the country to decide how it will affect the market environment and business in general. The more you understand the industries in detail, the easier it will be for you to decipher market dynamics.
b. Attitude he should have to work as an equity analyst:
One of the most under-rated trait for being a good equity research analyst is patience!
Remember haste makes waste.
Your customers trust you and will be basing their buy-sell decisions on your recommendations. You have to make sure that you do not rush into things but ponder every small detail and try to decipher every tiny bit of intelligence.
You will have to meet various industry participants to talk to them and understand the pulse of the market.
Remember these are professionals and will always be busy. It might happen that even after giving you appointments, they might cancel them due to impending work or meetings. They might postpone meetings and make you wait for hours together.
But remember that speaking to these experts can give you that edge when you are writing your equity research report.
So you need to pull in all your patience and make sure you don’t divert from your course. If you are persistent and patient, you will be able to eventually get all the interviews you are looking for and add value to your equity research reports.
You will also need all your patience when you are building equity research models. These models can go for a single sheet to multiple sheets. You will have to link numerous cells and add multiple formulae to create your final model.
Remember to be very patient and concentrate very hard when you are building your models. One small mistake or one wrong formula can upset your entire model. Finding that mistake will be a nightmare. It will be like finding a pin in a hay stack! So be as patient as possible!
ii. Open to learning all the time
Again it might sound very generic if I say that you need to be open to learning all the time. But believe me, life is all about learning every day. You have to keep your eyes and ears open all the time and absorb as much as possible.
Another important tip is to read, read, read and read some more.
Read investment reports, read company annual reports, read press releases, read reports on geopolitics, read reports on mergers and acquisitions, read reports on the economy.
In short, read anything that sparks your curiosity, even fiction novels …it’ll help you ignite your mind and thinking out of the box capabilities.
Also read the daily news and that too from as many sources as possible every single day.
Also you should start to develop a view about the news and how it affects various organizations, industries, businesses, countries and even individuals.
The most significant skill set for any equity research analyst is to understand and decipher information. The analyst who can understand intelligence the best and act decisively on that intelligence wins the day.
iii. Understand the subject properly – go into depth of the matter
For you to provide a recommendation or a direction based on your findings, you will have to be very certain about it. You'll have to be able to argue your case soundly for a valuation, in clear and concise terms that your customer can understand.
You need to understand the subject properly and really get into the depth of the matter.
Remember shortcuts will never help you in the long run.
You have to make sure that every statement that you provide in your report has a ‘why’ and ‘so what’ element attached to it.
The reader should be able to understand very clearly what you have proposed and what would happen if he follows your direction.
iv. Verify every piece of information you get
The one thing that is required of you is to be able to establish a passion for investing.
Once you have that passion, you will make sure that whatever you present is of utmost quality and integrity.
To do so you have to make sure that every piece of information that you gather is verified from reliable sources.
Speculation and rumors have no place in financial research or rather in any type of research.
You will be collecting intelligence from various sources, so you’ll have to be careful about the quality and authenticity of the source of the information. It is always better to specify the source of information in your report to add validation to your intelligence.
v. Avoid Conflict of Interest
Conflict of interest can be a major concern in equity research.
Many equity research firms that create equity reports for their customers are also investment firms, aggressively selling the same shares to them. This activity makes it very hard to believe that the intelligence provided is completely free of bias.
Hence you have to be very careful that there is no real conflict of interest, and if there is, you have to make sure that it is clearly specified in the report.
c. What should his approach be?
i. He should be Unbiased
You should make sure that the contents of the equity research report should be unbiased.
It should not be partial towards any particular company or a business house.
You have to remember that a lot of people will be taking investment decisions based on your reporting. They trust you and your reporting and you are obliged to provide them an unbiased opinion.
The more trust you can build with your readers, the more they will vouch for your reports.
ii. Detailed as possible
While writing equity research reports, presume that the person who reads is new to the company and he does not have any knowledge about its business. So, your report should include extensive information about the company, its products, key financials, its management, current market dynamics, and future strategies of the company, growth estimates, and the probable risks faced by the organization.
You have to make sure that the information you present is detailed and covers all the above elements properly. You should not leave any questions unanswered and the reader should not have to go looking for extra information after reading your report.
Best way to approach writing is to write your headlines and subheads first. A strong and impactful headline is critical to entice readers into looking at your report in the first place.
Solid subheads help to keep the reader engaged, acting as guidelines to keep them go through the remainder of your report. Make your subheads intriguing as well as informative. Once you’ve written your subheads, appraise them to see what the reader will comprehend if he or she reads only that segment of your report. Is there a convincing story? Will they get the substance of your report?
iii. Should try to answer ‘so what’
The biggest mistake that most analysts make is just stating the facts in the reports. You have to remember that you are not a reporter but an analyst. The reader expects answers from you – not news! They want you to give them a direction. So you have to make sure that every piece of information you give, has a ‘so what’ attached to it.
For example: Just saying that ‘Company X will have a higher debt-equity ratio in future as it is planning to take a huge long term loan’ is not enough. You have to tell the reader, what will happen because of this. According to you, is this good strategy by the company or no? What effect will this have on the future revenues and share price of the company?
iv. Consider all the risks applicable
Every equity research report should include current and future negative sector and organization happenings which might cause as a danger to the investment decision.
Risks can be of various types – operational, financial, economic or connected to legal issues or regulatory procedures. Though companies are obligated to disclose all the risks which could affect them in their financial statements, risks are many times subjective and difficult to quantify.
It is your job as an analyst to find out the various risk factors which can affect the performance of the company or the industry and report them in an unbiased manner.
Do not overlook any risk however small or insignificant it might look to you. Let the readers decide if the risk is worth considering or no – you should report all the probable risks.
v. KISS – ‘Keep it simple and sweet’
This is the ‘Age of Minimalism’. So always remember the principal “less is more”. This does not mean that you just give a brief snapshot, but explain the concept properly for the reader to make up his mind about the financial strength of the organization. It means giving precise and relevant intelligence which will assist the reader to quickly comprehend the organization’s financial health and take calculated decisions.
vi. Write in such a way that the reader understands clearly
Use simple language which everyone can understand. Do not unnecessarily go for fancy words or jargon which will send your readers running for a dictionary.
You should keep your sentences brief for the same reason you should keep the paragraphs short - they’re easier to read and comprehend. Pick up any newspaper and observe the writing – you will see short paragraphs everywhere. They do that to make reading easier, as your brain absorbs information better when it’s divided into small parts.
Every sentence must have one simple thought. More than that creates complications and invites uncertainty.
Another thing to remember is that; don’t keep writing similar stuff over and over again. In other words, write something once properly and definitively, rather than repeating it several times. When you repeat yourself or keep writing the same stuff again and again, your readers might just go to sleep.
So I think I have tried to be as detailed and lucid as possible in this guide which will definitely help you to become the best equity research analyst in the world. Again this is not a shortcut to success, but just a guide which will enable you to plan your journey towards the goal of becoming a very successful equity research analyst.
I would like to wish you all the best in your quest to becoming a successful equity research analyst.
Do feel free to send me any queries that you may have.