What is Equity Research?
Equity research professionals are responsible for producing analyses, 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. Banks often use equity research as a way of “supporting” their investment banking and sales & trading clients, by providing timely, high-quality information and analysis.
How are Equity Research Divisions Organized?
If you’re looking for a career in equity research, then 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 and 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 within an 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, and telecommunications. 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.
What Do Equity Research Analysts/Associates Do?
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 or 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 releases quarterly results or announces something.
The contents of an equity research report typically include:
- Industry research (competitors, trends, etc.)
- Management overview and commentary
- Historical financial results
Each of these sections is broken down in more detail below.
Breaking Down an Equity Research Report
Below is an example of the cover of an equity research report from a bank.
1. Industry Research
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.
2. Management Overview
It’s very important for anyone considering a potential investment in a company to understand the quality of its 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 do an assessment of their competence and relay that information back to investors.
3. Historical Financial Results
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 of 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 providing 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 forecasting looks at the industry-first (its size, growth, pricing, etc.), then determines how much market share a company is likely to have, and finally, works down to revenue.
A bottom-up approach starts with the basic drivers of revenue, such as the number of customers, or the number of units sold, and then works up to a revenue forecast. Professionals in equity research have to forecast quarterly data (or whatever frequency the company reports, e.g., semi-annually 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 build on them with even more assumptions, such as 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 they 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:
- Buy / Overweight / Long
- Hold / Market weight / Neutral
- Sell / Underweight / Short
How to Get Into Equity Research
If you’re looking for a career in equity research, then 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 the following resources: