ER and personal investments question
Hello everyone, I am new here and about to graduate with a PhD in Organic chemistry and considering a drastic move to ER for pharmaceuticals. I have one main question. How do personal investments work in the sector that you are covering? Is it considered insider trading and forbidden? Assuming a standard career path in starting out on the sell-side as many do, I have a hard time working out the idea that your job is basically a professional stock picker, so why cant you invest in your own ideas? If you can invest in your own ideas in your coverage sector, are there limits? If you are advising the buy side on what to invest in with your reports, cant you just use your own reports for yourself as well? I mean, its YOUR research and YOUR report using PUBLIC information, so why wouldn't you be allowed to invest in stocks you are covering?
Also, If you are not allowed to invest in your own ideas or companies that you are covering, could you still advise your family members or friends to invest in them? This whole concept is fuzzy to me and I have not found any straight forward answers to it.
Thanks in advance!
You'll have a "restricted list" of securities that you cannot buy. They are not necessarily limited to your sector, because the company you work for might have material non-public information about them (ie upcoming research reports that could move the stock once released).
Because you could buy a stock, then release a "Buy" rating to pump it up, market it to investors to pump it up even more, then drop the stock for an easy profit.
No, for the same reasons as above.
Source: I've been interning in ER for the past 10 months. Note that some of this is firm-specific, though many firms will have the same rules in place, at least nominally.
You technically can own stocks that you cover, but there are restrictions on when you can trade (within a certain number of days of publishing). That being said, most banks (if not all) just say that you can't own anything in your coverage.
True true. Those are just my bank’s rules, which are a very slightly beefed up version of the FINRA rules.
This somewhat makes sense, but you are working for a reputable sell side firm. I don't think they would tolerate pump and dumpers working for them and your reputation would be killed forever should you be accused of this, as well as the firms. I was talking more long term investments, not swing trading. If you believe company xyz is a good buy over the next year or more (and somehow you manage to initiate coverage on it), your firm still wont allow you to hold it for the long run? Is it me, or does this seem odd that you have this great idea that you cant even profit from (aside from selling reports)? I know another user just mentioned that his firm does allow him so perhaps it is possible, but yours seems to be the norm and I just dont get it assuming there are proper holding restrictions in place and proper disclosure given on reports.
How about the buy-side? If your an analyst there and you tell the PM that you have this great idea to consider for the firms portfolio, are you allowed to hold it in your personal account as well?
It depends on the firm. Everyone's rules are different. You just need to find out what their policy is.
You are going to be making far more money working in ER than you ever will by trading/investing the stocks you cover. Just see it as the cost of doing business.
Even investing in it as a long term investment presents a conflict of interest because if you own stock in the company you’re researching, it is in your own best interest to not release a report that would harm the value of your investment. Basically, the point is that someone working in ER could theoretically manipulate the value of the stock if they wanted to by issuing false recommendations and talking the stock up to clients.
Also, in order for your investment returns to pass your total comp, you’d have to have over a million dollars invested, assuming that your annual rate of return is at or just under 10%. Basically, you won’t have that kind of money for years if you’re doing ER.
@sfgfan10 those are valid points and it makes sense. I guess I would have to clarify before signing then, because if I have a great idea, (since I would be covering the biotechs as a science PhD, these are either boom or bust and gains of 500% or more are not uncommon) I would hate to have to miss something like this if I honestly believe in the company when it is still pre-clinical. And I never meant to imply that I would outperform my salary with investments, its just nice to be able to build up a personal portfolio during your career.
Lastly, do these kinds of restrictions typically carry over to the buy side? If I work for the buyside and I recommend something to the portfolio manager, will I be able to hold it in my personal account as well, or also hold in my personal account similar holdings as the firm?
Thanks for the replies!
Not sure about this. I think the bigger issue there is if you are putting your portfolio before your client’s portfolio. Again, I’m not an expert on this bit at all.
compliance is the bane of my existence.
So realistically speaking though, do the firms you work for actually monitor your family members portfolios? How could they possibly know if you advise your parents or close friends on the stocks you are covering, or even just your sector in general?
They wouldn't know and they don't want to know. The firm wants to make sure they don't get smacked with a fine. Compliance is there to make sure you don't cost them money in a regulatory way. The only way I can see family or friends account trades being discovered is in the course of an actual insider trading (or other securities law infraction) investigation. However, tipping off initiations or rating changes before you launch (and having people around you front run your report) would be a bad look, and it is getting easier to detect digitally.
One conflict that arises with investing in companies you provide sell side coverage on is that you can not trade against your rating without an exception from compliance (eg> prove hardship or something). Rating a stock a Buy/Outperform and dumping it from your PA without permission is a no no. Even rating it a Hold and dumping it is inconsistent with the rating you provide clients. My suspicion is the ER business doesn't justify the compliance and regulator headache required for analyst friendly trading policies. You will cover all of this stuff in the process of obtaining FINRA licenses, including whether you can invest in companies within the same sector as your coverage universe.
At the firm that I intern for, trading in any stock that the firm covers is strictly prohibited. Additionally, any account that allows you to trade individual stocks must be held with the firm itself so that compliance can monitor your trades. In my opinion, these rules are far too strict, but I don't have a lot of money that I would be investing anyway, so it doesn't really affect me. Even if I did have the money to invest, it seems to me that professional portfolio managers have a significant advantage in terms of the time that they can devote to a given stock and their overall level of sophistication. While I love working in equity research, I recognize that being an expert on a single group of stocks doesn't mean that I could put together a market-beating portfolio in my free time.
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