Equity Research is the process of collecting relevant information about a company and processing that information into actionable recommendations for trading that company’s equity stock.
Equity research analysts exist on a plane somewhere between traders and pure researchers. What this means is that they still spend a lot of time performing quantitative analysis like their investment banking brethren, but this analysis is directly used for the trading of equities in order to profit from stock price movements. The job of an equity research analyst may be divided into three broad categories:
The first part of the job is to collect all relevant event information necessary for an analyst to perform his job. Analysts gather information from a wide variety of sources. The best source, as you can imagine, are the annual financial reports released by the target company. This also includes quarterly reports containing revenue or other data released periodically. These documents contain a wealth of information and the most thorough and comprehensive data that can be used for equity analysis. Most large companies also have earnings calls where they discuss the company’s financial results during a webcast, for example, and might also field analyst questions.
In addition to company specific information, analysts also have to look at the broader industry and the economy as a whole. For example, if there is a political crisis which is impacting oil prices, then that will likely affect the stock price of every oil company irrespective of its individual performance. This information is either obtained from public sources like the news media or can be bought from research firms which track every news event and then package that information into summarized reports.
Lastly, there are service providers like Bloomberg, Factset and Thomson Reuters which provide a lot of valuable information to paying clients.
As you can imagine, a good analyst needs to have his ear to the ground and expertly curate all sources of information available to him. In my opinion, this part of the job is more important than the actual analysis as the output can only be as good as what you put in.
Processing Information into Actionable Insights
The second part of an equity analyst’s job is to process all available information into usable and actionable insights. All available and relevant financial data is entered into a software (like Microsoft Excel) and then projections are made based on reasonable assumptions, historical data and market trends. This information is then used to calculate the fair price of the company stock or make future predictions.
Each analyst may have a slightly different approach like running varying simulations, using different sources of information, placing different weights on variables and so on. The end result of any such analysis is usually a prediction of the fair stock price within a certain range. The equity analyst might then issue a buy or sell recommendation based on that prediction.
Presenting and Communicating your Recommendations
The final part of the job is effectively communicating your recommendation and the rationale for that recommendation in your concluding report. People making the ultimate buy and sell calls usually won’t have the time to go through your raw data and therefore all the relevant information needs to be presented to them in a digestible and quick summary. Your ability to effectively communicate your recommendations and justifying them using a sensible thought process will have a significant impact on how well your reports do.
Over time, the best analysts develop a reputation for accuracy and credible analysis. They carry this reputation with them even if the switch banks and this “sticky” reputation will add massively to your value as an employee. It can be hard to differentiate yourself in a global marketplace filled with tens of thousands of equity research analysts. How you perform at this part of your job, therefore, can prove to be an important differentiator.
Skill Requirements for Equity Analysts
Equity analysts rely heavily on their ability to manipulate large volumes of numerical data and to make accurate predictions regarding security prices from that data. They also must possess the ability to bring logical order to a job that depends a lot on uncertain assumptions.
Financial analysis – An equity research analyst will spend the majority of his time poring over financial data and performing analysis. Very strong quantitative skills are required for any equity research role. This part of the job includes scenario testing, simulation, analyzing historical time-series data, working with large datasets, risk analytics, portfolio construction, and so on.
Sector specific expertise – Equity research analysts usually cover multiple stocks within a single sector. This means that they are expected to develop an exceptionally strong understanding of how each sector works. Some examples of these sectors are as follows: financials, utilities, consumer staples, energy, industrials, healthcare, technology, telecommunication, real estate, automotive, biotechnology etc.
The analyst would usually be expected to cover just one of these sectors and the more you know about that sector, the better you will perform.
Macroeconomics – It is not only the performance of a specific company that is being analyzed; because peers, competitors and suppliers can also affect it. Macroeconomic trends or geopolitical events also tend to majorly impact security prices. An equity research analyst must therefore be fully tuned into what is happening in the world of business and politics.
Working in a time-sensitive environment – Workload in equity research can be rather lopsided. During earnings season, when a lot of companies announce their financial results, there is a tonne of work to be done. These are weeks when analysts spend countless hours at the office trying to get the research reports out in time. Any delay in the issuance of the reports can lead to a loss of business as there are competing firms trying to sell their own equity research reports.
Resourcefulness – Analysts are expected to work with a lot of data which needs to be acquired from multiple sources. This is not something that is overly complex technically, but it does require the individual to be rather resourceful while still not crossing the ethical line.
Programming skills – Many equity research shops require their analysts to have an understanding of Python, R, Matlab, SQL, VBA etc. Your ability to work with these will definitely increase your value to the firm. These skills can be acquired on the job, through self-study or just by going through some basic online courses.
Creative and technical writing skills – All equity research analysts are expected to produce a report that not only highlights the technical aspects of his research but also presents the information in an easily understandable format. Use of visual aids is usually encouraged along with the ability to present your conclusions without ambiguity or unnecessary verbosity.
Breaking into Equity Research
To build your resume for an equity research role, look at all of the skill requirements and the job description mentioned previously in this article and think about what you can showcase from your academics or past work experience to match those requirements.
The first thing you need to do is to obviously focus on your number crunching and quantitative abilities. This is not just a matter of knowing Microsoft Excel, but also understanding how valuations work. Next up on the list is showcasing your deep understanding of a particular industry. Ideally, this industry should match with the role that you’re applying for. Lastly, your knowledge of Python, R, Matlab, SQL, VBA etc. might also come in handy.
The best way to achieve all of this is by showcasing your previous equity research experience and your best work. Students without any experience can still present reports that they worked on as part of their college curricula or as an extra activity. Keep in mind that the recruiters are probably looking for someone with a solid thought process more than anything else.
All of this information needs to be presented in a manner that makes your CV pop out. Which can mean something like having a big brand on your CV that can immediately grab the attention of the person sifting through a pile of them. If the role specifies a particular sector, it might make sense to highlight anything from your past related to that sector. Equity research is more about understanding the business models of the companies that you track than it is about learning finance.
Lastly, be aware of any major happenings in the securities business. For example, how MiFID II will affect equities trading in Europe or how artificial intelligence and machine learning programs can help or hinder your job.
Like most banking roles, finance, economics, business, mathematics, statistics, physics, engineering or accounting degrees are preferred for equity research as well. If you are still in college, make sure to also develop some programming skills as they are helpful for many roles on the security side including equity research.
An MBA is also valued since you learn a lot about all aspects of business from operations to marketing to finance. And all of these together are what provide value to a company and thus affect its stock price. Knowing how companies operate in great detail is a great asset to have as an equity research analyst.
Another qualification that is in great demand for all securities related roles is the CFA designation. The curriculum of the CFA exam matches quite perfectly with all of the things that an equity research analyst needs to know. What you learn as part of your CFA qualification is so valuable for an equity research analyst, that many banks offer to pay for your exam if you decide take it.
I can also recommend the Online Professional Certificate in Valuation offered by the New York Institute of Finance. This fully online course takes about 45 hours to complete and offers the perfect opportunity to build a strong knowledge base while also adding value to your CV.
Lastly, we have the FMVA (Financial Modeling & Valuation Analyst) designation from CFI. This one is becoming increasingly popular of late and is an excellent choice for quity analysts. I have reviewed the FMVA in greater detail in the linked article.
In the US, Series 7, 63, 86, 87 exams (or others) may also be required. Check the FINRA website for details.
If you need some help with your CV, you can try out some of the finance resume review services in this linked article.
Salary and Bonus
Analysts and associates in equity research can expect to earn an annual base salary of between $80,000 to $150,000 in their first few years on the job. There is also a variable component on top of this which depends on your performance and can increase your total compensation by 20% to 50%.
There is a significant difference in pay between the large international banks and smaller regional shops. Location also is a significant factor as places like New York pay the most (but also have a higher cost of living). Global financial hub like Hong Kong, Singapore and London which have a lot of security trading also pay well but generally not close to US levels.
There can also be a difference between salaries based on what type of equity research you are doing. Buy side and sell side research analysts often get paid differently. For some financial institutions, equity research is a cost-center while for others it is a revenue generating department (for example, if the reports are sold). Factors like this can impact your salary.
A Day in Equity Research
A typical day for an equity research analyst can vary wildly depending on when you manage to catch him. During earnings season, most companies issue financial statements showcasing their quarterly results and this can be a very hectic time for equity research professionals. During this period, they are in a race against time to issue their updated analyses on a company’s stock performance based on the recently revealed information.
Earnings season or not, an equity research analyst’s day usually starts early at around 7 AM – well before the market opens. They look at all the major news from around the world that has the potential to impact the sectors and stocks that they cover. Most setups have a daily early-morning meeting, briefing or huddle where the entire team covering that sector meets and discusses events.
Analysts are also expected to frequently update their colleagues on the trading floor with any information that can affect their trades. Senior analysts are further expected to interact with key clients directly. Whereas the junior analysts spend more time working on the reports, the senior teams spend more time communicating with internal stakeholders and clients.
An equity research analyst would usually spend less than 50 hours at the office during a typical work week. The downside, of course, is that most of this time is spent slouched over a computer screen which can get quite tiresome. As you rise through the ranks, things get progressively better. But you still should not expect a huge amount of client interaction, especially when compared with front-end roles.
The work week can increase dramatically during earnings season. This is a period lasting a few weeks which follows the end of each quarter when companies release their updated quarterly financial or sales figures. This release of information is also accompanied by earnings calls where the company’s management discusses the preceding quarter and plans for the coming period. It is during this time that the workday for equity research analysts can stretch to 14+ hours!
In my opinion, equity research is best for people who do not mind a sudden spurt of activity during certain pre-defined periods of the year. It is still a better compromise when it comes to work life balance when compared with investment banking where you may be expected to spend your entire year in top gear.
Career Path and Progression
Equity research professionals have quite a few attractive career options available to them. You carry your reputation in the industry with you so that can be quite an asset to have.
Option 1: Continuing in Equity Research
The most obvious career choice for equity research analysts and associates is to carry on doing what they know best. Equity research analysts and associates rise through the ranks to become AVPs, Directors and Managing Directors. At each of these levels, the work gets progressively better, the hours get easier, and you get quite a decent bump in compensation. Equity research work is well-suited for people who really like to crunch numbers and understand businesses. If that is what appeals to you, congrats, you have found your calling!
Another thing to remember is that the more time you spend covering a particular sector, the more reputation you build as an expert and the more valuable you become to your employer. This, over time, can lead to a fulfilling and rewarding career.
Option 2: Hedge Funds or Asset Management
Countless equity research analysts and associates eventually move on to become fund managers at asset management firms, hedge funds, mutual funds or other such setups. This is an obvious and logical move as the core skills necessary for a fund manager role are quite similar to what an equity research analyst learns over the course of his or her career.
As a fund manager, you use the same research skills to determine whether a security is worth investing in or not. The main difference is that rather than just looking at one single security at a time, you look at your entire portfolio and then do a relative analysis of which security to invest in.
Option 3: Trading or Private Funds
Some equity research analysts have also gone on to manage the private portfolios of high net worth individuals. This essentially means that you work for one or more rich people and manage their personal investments. The reason this may be preferable over other exit options is that you have a lot of flexibility in terms of the amount of workload that you want to take on. You can operate as your own business entity rather than as a salaried employee.
Option 4: Corporate Roles
Lastly, there are roles available on the corporate side. For example, you could be working in the investor relations team of a company which is responsible for interacting with investors including equity research analysts. Depending on your sector experience, you might prove to be quite a valuable asset to a company operating in that sector and will get paid accordingly.