Equity Research Overview

Supplying investors with precise financial analysis and recommendations.

Equity research (ER) professionals are in charge of analyzing, recommending, and reporting on investment opportunities that their clients, investment banks, or institutions may be interested in pursuing. 

Equity research overview

Its main goal is to supply investors with precise financial analysis and recommendations on whether they should buy, hold, or sell a specific security. 

Analysis of a company's financials using ratio analyses and forecasting its financials in Excel is a key part of the research process. 

It is often used as a method of assisting a bank's investment banking and sales & trading clients by offering up-to-date, reliable information and analysis. 

Equity researchers analyze stocks in order to assist portfolio managers in making knowledgeable investment decisions. They utilize problem-solving skills, data analysis, and other tools to determine and forecast a particular security's prospects. 

In order to assess a security's behavioral outlook, equity researchers must quantitatively evaluate a stock's statistical data relative to recent activity in the market. 

Other tasks of equity researchers include:

  • Creating investment models and screening tools that recognize trading strategies that assist in the management of portfolio risk.     
  • Finding patterns with price changes in the current market and utilizing this data to develop algorithms that find stock investment opportunities that would be profitable. 
  • Comprehending peculiar differences among international markets, so that they can analyze and compare domestic and foreign stocks. 

Organization of equity research divisions

If you are looking to pursue a career in ER, it is essential that you understand that it has a relatively flat organizational structure. On the other hand, investment banking is quite hierarchical. ER typically only has two main positions: Associate and Analyst. 

Organization

Equity is different from most other areas of corporate finance because the Analyst position is more senior than the Associate position. The Analyst usually has chief responsibility for covering a group of companies, and a few associates work for them. 

Typically, analysts are divided into various industry sectors to cover similar companies within a given industry. Most of the time, ER analysts need to have a lot of specialized knowledge about the sector they work in. As a result, most analysts stay in one industry.

Some sectors of ER include healthcare, internet, technology, mining, telecommunications, consumer discretionary, and consumer staples. 

Usually, one team of an analyst and associates will cover anywhere from 5 to 15 companies. Some factors that determine the number of companies a team will cover include its seniority, company sizes, and the industry. 

Producing reports is the main job of equity researchers. These reports may be "flash reports," which are quick updates, or "initiating coverage" reports that are more in-depth. ER associates and analysts must be constantly publishing these reports. 

Additionally, equity researchers must be able to build financial models.

A typical ER firm also has a Head of Research that is in charge of managing the analyst team by leading, coaching, and guiding them to make sure that all goals are reached. 

The role of the Head of Research is to supervise the research reports and publications by editing and checking the accuracy of analysis and recommendations made to brokers. 

As a manager, the Head of Research is also responsible for hiring, paying, and training staff. 

Equity research report

It is a document that is arranged by an ER analyst. It provides investors with insight into specific securities. In the report, analysts offer recommendations for buying or selling the security, along with its valuation and risks.

Research report

Components of an equity research report include:

1. Industry research 

This section of the report details the trends and competition in a specific industry. Components of the industry to consider include the current social, political, economic, and technological environment. 

2. Overview of management and commentary 

It is essential that the report considers the nature and quality of the target's management team. Equity researchers have direct access to management, so they have the ability to contribute value to the report. 

While individual investors do not have this ability, equity researchers are able to directly contact management and ask them questions about the business. They then can pass on that information to investors. 

3. Historical financial findings 

One of the fundamental tasks of ER is to assess financial results and compare them to the provided guidance or to the expectations of the analyst. 

A stock's performance is primarily derived from reality vs expectations. Analysts must be able to determine if historical results were below or above the market expectations. 

4. Forecasting 

Equity researchers must also be skilled in financial modeling and in producing both top-down and bottom-up forecasting. 

The top-down forecasting method first looks at aspects of the industry like its size, growth, and pricing. Then, the researcher must assess a company's market share, and then eventually work down to revenue. 

The bottom-up method begins with the fundamental producers of revenue (e.g. units sold and the number of customers) and then works up to forecast revenue. 

5. Valuation 

Equity research analysts may be tasked with building financial models, such as 3-statement models and DCF models. These models are built from assumptions from the forecast and add more assumptions (e.g. valuation multiples or discount rates). 

6. Recommendations 

In this section of the report, the analyst will present a target price that advises the investors about the stock's price in a year's time. They also recommend whether or not the investor should buy, hold, or sell. 

The analyst will compare the fair price of the security with the current market price. If the fair price is below the current market price, the security is considered overvalued and the recommendation is to sell. 

The opposite is true if the fair price is above the current market price: the security is considered undervalued and the recommendation is to buy. 

Equity research vs. investment banking

Investment banking has often been viewed as the top banking role for the best talent. However, many talented workers have been shifting toward pursuing management consulting, technology, or entrepreneurship because of the arduous hours required of investment bankers. 

Equity research is another great role for prospects who want to work in the financial services industry. While it is sometimes considered less attractive with lower compensation in comparison to investment banking, reality differs from this commonly-held perception.

ER vs investment banking

Here are some of the key differences between equity research and investment banking:

1. Work-life balance 

12-hour days are typical for equity researchers. However, their volume of work is usually highest while initiating coverage and during earnings season. 

Investment bankers have brutal hours, they commonly have 90- to 100-hour workweeks for analysts during the busiest times. 

Recently, there has been increasing backlash to the insane number of hours that investment banking analysts have to work. The common objection is that analysts experience burnout as a result of their lack of work-life balance. 

On the other hand, this complaint is rarely heard from equity researchers. 

2. Visibility 

ER associates and analysts often receive recognition for their work. Their names are usually on the research reports they compile for a firm's sales force, client, and media outlets. 

Media outlets often seek out senior equity research analysts because they are recognized as experts on the companies in the sector that they cover. 

Conversely, investment bankers at the junior level do not have high levels of visibility. However, their visibility can increase as they move up in seniority and if they are put on high-profile deals. 

3. Advancement 

Investment banking has a clear-cut path for career advancement. Analysts usually stay in their role for two to three years and then become associates for three or more years. After that, they can become a vice president or managing director

ER has a less clearly-defined career path. The typical progression is from associate to analyst to senior analyst to the vice president or director of research. 

Upward mobility is more common for investment bankers because they are deal makers and service the firm's largest clients. 

4. Education and designations 

A bachelor's degree is necessary for both equity research analysts and investment banking associates. 

Typically, these degrees are in fields like economics or finance, but could also include anything from chemistry to computer science. 

However, further education and training are usually required to get a job in these fields. Equity researchers will often pursue the Chartered Financial Analyst (CFA) designation, which is almost considered mandatory for any equity researcher. 

Aspiring investment banking associates will typically pursue a Master of Business Administration (MBA) degree instead of the CFA because their role is more business-oriented. 

Many investment bankers pursue their Series 7 or Series 63 FINRA licenses to demonstrate comprehensive knowledge of financial markets, investments, and company organization. 

5. Required skill sets 

Both investment bankers and equity researchers must have excellent analytical, quantitative, and technical skills. 

However, this especially applies to equity research analysts because they must carry out complicated calculations, run projection models, and prepare financial statements with tight deadlines. 

Earlier in both careers, these professionals must practice financial modeling and in-depth analysis. However, later on, the skill sets of investment bankers and equity researchers diverge.

As they become more senior, investment bankers take on more managerial and client-facing responsibilities. On the other hand, research analysts must have sufficient verbal and written communication skills in order to carry out analysis and due diligence

6. External opportunities 

Both professions have great external opportunities because of the extensive knowledge and skills required for these roles. 

Research analysts usually exit to the buy-side while investment bankers may end up in private equity or venture capital. The buy-side includes institutional investors that purchase securities for money-management purposes. 

7. Compensation 

Both professions are very well-paid, however, investment banking is the more lucrative career path. Investment bankers receive generous salaries, as well as substantial sign-on bonuses. 

While investment bankers can receive commissions, research analysts are not able to be compensated from investment banking revenues. 

However, research analysts can receive bonuses that are based on the success of their recommendations, the firm's profitability, and rankings. 

Day in the life of an equity research analyst

7:00 am – Arrive at the office

  • Check emails from salespeople and traders.
  • Analyze how all of the open global stock markets are doing.
  • Assess all news that is related to your assigned industry sector.

7:30 am - 8:00 am – Morning meeting

  • First, you will discuss recommendations with the sales & trading team.
  • All analysts must present their research and opinions on important happenings in their sector. The head of Research will offer their opinions on the overall markets.

Life of analyst

9:00 am – Market opens

  • Check for important developments in your sector. 
  • Determine whether there have been any drastic price movements in the stock market. 

10:00 am – General work

  • Fulfill typical duties of a research analyst (i.e. updating financial models, completing client requests).
  • Keep up to date with the news.

11:00 am – Discussions with clients

  • Explain your work to buy-side clients.

3:30 pm – Market closes

  • Analyze any movements in the market of the covered company at closure.
  • Make sure the client is up-to-date with any relevant market information.

4:00 pm – Research publications

  • Start a new research publication piece for the next few days.
  • Typically, a research analyst will complete 1 to 2 research pieces per week.

7:30 - 9:00 pm – Leave the office

  • Unless there is an earning season, the analyst may now go home. 
  • In the case that it is earnings season, the analyst must prepare the result update report for the next morning. 

Who funds equity research?

Independent ER firms do not have a sales & trading division. As a result, they carry out financial analysis and charge a fee on a per report basis. At major ER firms, brokerage trades earn fee income

Fee income refers to the revenue that is created by a business operation by charging its customers a fee. 

Brokerage firms (made up of investment banks and stock brokers) give investment ideas to their clients (mutual funds, institutional investors, and retail investors) and in turn, brokerage firms receive equity trades from their clients. 

Equity research funding

Buy-side firms include hedge funds, insurance companies, and pension funds (among other things). Sell-side firms are typically investment banks (e.g. Goldman Sachs, Credit Suisse, JPMorgan Chase, etc.) 

The role of the buy-side firm is to manage the portfolio of security and seek advice on investment decisions from sell-side analysts. This advice is given to the buy-side analysts for free.

If the buy-side firm decides to invest in the security, it may want to carry out the trade through the sell-side firm's trading division. 

In turn, the trading division of the sell-side firm will receive a commission for the execution of the trade at the lowest price. 

As a result, the commission is the earnings of the research firms. 

Financial Statement Modeling Course

Everything You Need To Master Financial Statement Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Researched and authored by Rachel Kim LinkedIn

Reviewed and edited by Sakshi UradiLinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: