Equity Research Overview
A complete overview of equity research and what it entails
A complete overview of equity research and what it entails
Equity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in. The Equity Research Division is a group of analysts and associates at an investment banking (sell side), an institution (buy side), or an independent organization.
The main purpose of equity research is to provide investors with detailed financial analysis and recommendations on whether to buy, hold, or sell a particular investment. Bank often use equity research as a way of “supporting” their investment banking and sales & trading clients, by providing timely, high-quality information and analysis.
If you’re looking for a career in equity research it’s important to know that it’s a fairly flat organizational structure (unlike the hierarchy in investment banking) and the two main positions are Associate and Analyst. Unlike other areas of corporate finance, the Associate position is more junior the Analyst position is more senior. Typically, an associate (or multiple associates) work for one Analyst, who has overall responsibility for covering a group of companies.
Analysts are usually divided into industry sectors to cover similar companies in that industry. Most sectors have a lot of specialized knowledge required so it makes sense for an analyst to stick to one industry where they can become experts. Some of the largest sectors in equity research include consumer staples, consumer discretionary, internet, healthcare, energy, mining, technology, telecommunication, etc. A team of associates and an analyst will usually cover at least 5 companies and could cover as many as 15 depending on their seniority, the sizes of the companies, and the industry. More: see our financial analyst guide.
The main work in equity research is producing reports. Ranging from quick updates or “flash reports” to in-depth “initiating coverage” reports, the job of an equity research associate of an analyst is to constantly be publishing. Another big part of the job (discussed below) is financial modeling.
Working in equity research can be compared to what it’s like to be a university student. There are lots of “assignments” or “papers” due with fairly regular deadlines, such as when a company release quarterly results or announces something.
The contents of an equity research report include:
Each of these sections will be broken down in more detail below.
Below is an example of the cover of an equity research report from a bank.
In this section of an equity research report, there will be lots of information on trends and competition in the industry. This is where frameworks like Porters Five Forces or a PEST analysis can come in handy to ensure that you’ve covered all the dynamics in the industry including politics, economics, social trends, and technological innovation, to name a few.
It’s very important for an anyone considering a potential investment in a company to understand the quality of their management team. This is a place where equity research analysts can add real value, since they have direct access to management on quarterly conference calls, “analyst day”, site visits and other occasions. Unlike individual investors, they can ask management direct questions about the business, and then an assessment of their competence and relay that information back to investors.
One of the core jobs of equity research is to analyze historical financial results and compare them to the guidance that was given, or compare them to the Analyst’s expectations. The performance a stock is largely based on reality vs expectations, so it’s important for an analyst to analyze and understand if the actual historical results were below, at, or above market expectations.
To learn these equity research skills, see our financial analysis courses.
Forecasting financial results is more of an art than a science. We’ve written about this extensively in our guides on how to be a good financial analyst, as well as a breakdown of financial modeling skills.
To summarize the points in those articles, there are two main ways of forecasting: top down and bottom up.
Top down would look at the industry first (its size, growth, pricing, etc.) then determine how much market share a company will have and work down to revenue.
A bottom up approach starts with the basic drivers of revenue, such as the number of customers, the number of units sold, and up to revenue. Professionals in equity research have to forecast quarterly data (or whatever frequency the company reports, i.e. semi-annual in Europe).
For more on this, see our complete financial modeling guide.
The only thing that’s more of an art than forecasting is valuation. Valuation methods take all the assumptions from the forecast and builds on them with even more assumptions like a valuation multiple and/or a discount rate, both of which are very subjective. Analysts in equity research have to be good at financial modeling and may build a 3 statement model as well as DCF models or others as required.
Financial modeling takes practice, and we recommend browsing our specialized offering of professional financial modeling courses to become an expert.
In the recommendations section, the equity research analyst will have a target price (or price target) which tells investors where the expect the stock to be (typically) a year’s time. In addition to this, they will often make an actual recommendation to investors about what they should do. The language varies from bank to bank, but examples include:
If you’re looking for a career in equity research you’ve come to the right place. You’ll have to be good at financial modeling, valuation, and data visualization (charts and graphs for reports), and we’ve got all the courses you need to excel in all these areas.
Our top recommendations for equity research training include:
Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.
Get certified as a financial analyst with CFI’s FMVA Program.