Equity research analysts are like money detectives. They check out a company's money history, see what's happening now, and try to guess what might happen in the future with stocks or company shares.
Their main job is to help people decide whether to buy, sell, or keep their money for certain financial things. They look at detailed reports about a company's money and consider the risks involved.
Analysts also pay attention to what a company is doing, like attending meetings or events for investors. They gather all this information and use it to make financial models. These models help determine how much a company is worth and if it's doing well financially. They then predict how a company might do and say if it's a good idea to buy, sell, or keep the shares.
Equity research analysts are important because they help people make smart choices with their money for the long term. They work with different firms; some help manage rich people's money, some deal with pension funds, and others work with banks. They advise people who decide where to invest their money.
Even though they're good at using numbers, analysts spend more time writing reports and giving suggestions than doing complicated math. It's all about making money decisions easier for everyone.
Qualifications for Equity Research Analysts:
To pursue a career in equity research, candidates typically need a bachelor's degree, preferably in a related business field like finance, accounting, economics, or business administration. Degrees with strong quantitative training, such as in mathematics, statistics, engineering, or physics, are also valuable.
While a master's degree is not mandatory for senior analyst roles, obtaining one in business administration or finance can enhance opportunities for career growth, particularly in portfolio and fund management.
Skills Required For Equity Research Analysts
- Excel Skills
- Financial Modeling
- Valuations
- Accounting
- Technical analysis
- Report Writing
Now, let's talk about each one in detail.
1. Excel Skills - Equity Research Analysts spend about 10 to 16 hours daily using Excel for financial work. Here are the key things they focus on:
- Keep it Neat: They make sure their Excel sheets are well-organized and free of mistakes. Messy tables can cost them clients.
- Fast and Accurate: In the world of Equity Research, being quick and precise is crucial. Knowing Excel shortcuts helps them work faster, and most tasks are done without using the mouse.
- Useful Tools: Analysts rely on Excel tools like Pivot, Filter, Sort, VLOOKUP, and HLOOKUP to understand and analyze data.
- Plan for Different Situations: They create different scenarios (optimistic, pessimistic, expected) in Excel. This helps clients see how changes in assumptions affect things like target prices and CAPM beta.
- Visuals Speak Louder: Instead of lots of written words, analysts often use graphs and charts in their reports. Being good at creating these visuals is an important skill.
In a nutshell, being an Equity Research Analyst means being good with Excel, keeping things tidy, working fast, using helpful tools, planning for different situations, and being a pro at creating clear and informative visuals.
2. Financial Modeling: Financial modeling is about predicting a company's future using an easy Excel model. This includes forecasting statements like Income, Balance Sheets, and Cash Flows. It's not commonly taught in standard courses, but a modular approach is used. Core statements are built using different schedules, such as for depreciation or working capital. Learning financial modeling takes time and patience, but there's a Free Financial Modeling Course available for those interested.
3. Valuations - Equity Valuation is like figuring out how much a financial asset is worth. This comes in handy for various things like analyzing investments, making budget decisions, handling mergers, and even sorting out taxes or legal matters. Here's what you should know:
- Intrinsic Value: This method (DCF) figures out the value by estimating future earnings from the asset and then discounting them to their present value.
- Extrinsic Value: This method looks at market prices of similar assets. It uses ratios like PE Ratio, P/CF, and P/BV to determine value.
- Choosing the Right Method: There are over 15 ways to value something, including DCF, Enterprise Valuation, and Equity Valuation. The key is to understand why a specific method is used in a certain sector. For instance, banks are valued using Price/Book Value, but other sectors might use different metrics.
4. Accounting - Accounting isn't just about Debits and Credits; it goes beyond that.
- Master Financial Statement Analysis: Being good at Financial Statement Analysis is crucial. This includes understanding vertical analysis, horizontal analysis, ratio analysis, cash conversion cycles, ROEs, ROCEs, and more.
- Get the Right Data: Sourcing accurate data is a challenge. If you need a company's Annual Report, where would you look—the company's website or the SEC website? Key sources include Press Releases, Conference Calls, SEC Filings, etc. Using the correct data is vital for accurate analysis.
- Spot Accounting Tricks: In Analyst-specific Accounting, the goal is to uncover and predict accounting tricks used by companies. These are usually hidden, and spotting them is a key task.
5. Technical analysis - In the role of an equity research analyst, technical analysis skills are essential for comprehensively evaluating securities. A proficient equity research analyst adept in technical analysis can effectively assess market trends, identify entry and exit points, and enhance the overall understanding of a stock's potential. By utilizing various technical indicators and chart patterns, the analyst can provide valuable insights into short-term price movements, aiding in the formulation of investment recommendations. This skill set complements fundamental analysis and helps develop a holistic perspective on stocks, contributing to well-informed investment strategies within the equity research domain.
6. Report Writing - The equity research report is the main way a securities firm talks to its clients. Its main job is to help investors decide where to put their money.
- Priority Matters: Unlike novels where the best is saved for last, in a research report, stock target and price recommendations come first.
- KISS Principle: "Keep it Simple Silly" is the golden rule. Be direct and to the point.
- Less is More: You don't need a Ph.D. thesis. A single-page note or a couple of reports are great. Readers may only have 1-2 minutes, so they might not even get to the second page.
Types of Companies that Hire Analysts
There is a broad range of industries and companies that hire analysts to perform research.
Some of the most common types of companies include:
- Insurance companies
- Banks
- Governments
- Health Care providers
- Pharmaceutical companies
- Oil & Gas
- Infrastructure
- Education & Training
Progressing in Equity Research:
After gaining experience in junior positions, some analysts choose to pursue master's degrees by returning to school.
On the other hand, exceptional analysts can advance directly into senior research roles without further education. A senior equity research analyst, particularly skilled in a specialized area, may transition into an investment management role, overseeing both a research team and an investment portfolio.
In this capacity, a portfolio manager utilizes information provided by equity research analysts and other team members to daily manage the composition of securities in a portfolio.
Licensing for Equity Researchers:
While some firms may mandate Certified Public Accountant (CPA) or Chartered Financial Analyst (CFA) certifications for equity researchers, they typically do not need Series 7 and Series 63 licenses. This is because equity researchers do not engage directly with clients or execute buy and sell orders on behalf of clients, and thus, compliance with the Financial Industry Regulatory Authority (FINRA) is not necessary for their role.
Frequently Asked Questions:
1. How Much Does an Equity Research Analyst Get Paid?
The salary for Equity Research Analysts in India varies from ₹2.0 Lakhs to ₹24.0 Lakhs, with an average annual salary of ₹9.9 Lakhs. These salary figures are derived from the analysis of 2,800 recent salaries reported by Equity Research Analysts with 0 to 7 years of experience.
2. Who Do Equity Research Analysts Work for?
Equity research has two main types: sell-side and buy-side. Sell-side analysts work for banks and brokerages, studying stocks to advise clients. Buy-side analysts research stocks to find good investments for their own companies.
3. Is a career in equity research analytics a good choice?
One of its notable advantages is the flexibility and potential for advancement. Research analysts are in demand not only in investment banks but also in institutions and independent organizations. With experience, there are opportunities to move into higher roles, like a research team manager or investment portfolio manager.
4. Can a non-commerce student become an Equity Research Analyst?
Students will learn how to study stocks, price assets, and understand finance. They'll also pick up skills for investing, managing wealth, and making sustainable choices. To be good at equity research, students need practical training, projects, internships, and courses that focus on skills, plus talking to industry leaders.
Conclusion
In short, equity research analysts are like financial detectives who help people decide where to invest their money. They study a company's past, and present, and predict its future to guide investment choices. By looking at reports and attending events, they determine how much a company is worth and whether buying or selling its shares is a good idea. Analysts focus more on writing reports than complex math. To become one, you usually need a bachelor's degree in finance, and having strong skills in Excel, financial modeling, and writing reports is essential. Overall, equity research analysts make it easier for people to decide where to invest their money.
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