In simple words, equity research is understanding and studying any equity or stock. Let’s understand with the help of an example:
You have followed the stocks section of the newspapers religiously but just can’t fathom which stock to pick or which of your existing stocks you should sell. Should you wait for your falling stocks to rise again so you can make a profit? Or should you sell now and cut your losses? The stock market can be a tough place. Wouldn’t it be nice to have someone tell you which stocks to buy, hold or sell?
That’s where Equity Researchers come into the picture. Most Investment Banks have an Equity Research (ER) division, which is a team of experts closely following and analyzing listed companies on an ongoing basis. They delve deep into the fundamentals of the companies they cover (including industry sector and general macroeconomics), and come out with reports and ratings on whether the stock is a good buy (will appreciate in future) or hold (wait for a better time) or sell it off (likely to fall further). This is similar to a movie review by a critic, only, the movie in question is ongoing and the reviews may keep changing over time.
These reports are then distributed to the firm’s clients who in turn use the detailed analysis and insights in them to make intelligent decisions about trading the stock. The clients could be private investors, institutional setups or even private equity companies. M&A bankers also use ER reports extensively to build models and value companies. Occasionally, ER teams also produce reports on the broader macroeconomic environment, or a particular industry sector, etc. They may also analyze commodities or bonds (debentures) issued by companies and publish reports on them.
In short, equity research helps determine the attractiveness of an investment which will help make smart decisions for a private as well as a corporate investor. The career in equity research has become quite lucrative, thanks to the growing number of investors and also an increase in the number of foreign Investments. Equity research studies the financial statements, industry trends, competitors, economic conditions, etc., which enables the investors to make a wise and informed decision. Of course, studying these trends is extremely difficult for any investor and it also requires a knowledge of how to work in the stock market. Therefore, equity research analysts come into the picture. The work is quite challenging and demanding as the analyst needs to be vigilant about the current happenings.
Fresh candidates join the industry as Associates assisting the more senior Analysts. So the key skills for an entry-level role would be:
1. Strong analytical and reasoning skills: Associates have to be strong in analytical ability. They need to draw out the story behind a company’s data, whether qualitative or quantitative.
2. Knowledge of financial statements and their analysis: Big banks conduct their own training programs and teach their incoming batches everything from scratch. However, during lateral hiring or in the case of boutique firms that don’t have training resources, a candidate that knows the basics of financial analysis would definitely have an edge over others. Associates are encouraged to invest in a CFA program (Most firms usually refund the exam fees if cleared in the first attempt).
3. Attention to detail and diligence: Any small error made by the Associate / Analyst in their analysis can cause huge losses for the investors that depend on their opinion. Hence, it is extremely important to be thorough and pay very close attention to detail.
4. Ability to develop industry expertise: To be successful in this field, Associates must aim to become experts in their sectors. This would translate to becoming a top-notch Analyst and a force to reckon with among the industry players.
5. Writing and presentation skills: An Equity Researcher must communicate well, at least in the written form to begin with. As he/she becomes an Analyst, apart from coming up with well-written reports with reasonable predictions, networking abilities also become important as he/she may have to do marketing events like arranging non-deal road shows for their clients.
How to get in:
- Make it to the top tier B schools – meaning the IIMs A, B, C or ISB or other institutes in this league. Bulge bracket banks visit these campuses to select Associates for their ER division; either via internships or directly via their global ER program.
- You may also graduate from the next tier of MBA institutes (MDI, IIFT, IIT SOMs etc.), or complete Chartered Accountancy. Supplement this with a CFA charter and/or certifications like the FRM. It may also serve you well to know financial analytics and modelling. This could land you with an ER job in smaller Indian firms.
At the entry level, candidates join as Associates. Typically they have MBAs in finance or are CAs
- Typically the ER division is split into different coverage groups, each coverage group focuses on a specific industry sector. So, Associates will be allocated a particular sector and some companies within that sector.
- Associates assist Analysts in publishing reports. The major chunk of work involves research on the general economy, the sector and the companies in question. For this, they may directly contact companies or use secondary data sources (internet or other public sources). They have to constantly keep up with the news and events in their sector. Once the data is gathered, detailed financial models are constructed to come up with company valuations.
- Every quarter, once the earnings of a company are released, the ER team publishes reports on the company. Apart from this, any new development in the sector or a company may require a separate report to be published. When a new company is going to get analyzed for the first time, the team publishes an ‘Initiating Coverage’ report, which is much more extensive than the usual report, as it analyzes the macroeconomic conditions, sector, competitors, and the company itself in thorough detail.
- The hierarchy is quite flat. After spending an adequate number of years as an Associate and developing the required industry expertise, one can become an Analyst and publish reports in his /her own name. As this point, corporate access (or networking with the top guns in different companies) becomes more and more important.
Companies to target:
Notable International names: Goldman Sachs, JP Morgan, Morgan Stanley, UBS, Nomura, Barclays, Deutsche Bank, Credit Suisse, Citi, Bank of America Merrill Lynch, HSBC, Standard Chartered
Notable Indian names: Kotak Mahindra, ICICI Securities, Yes Bank, Avendus, HDFC, SBI Capital, Edelweiss
Salary and perks:
- The starting salary for Equity Research Associates in bulge bracket banks is over INR 25Lakhs/annum. This is just the fixed pay and there is usually a bonus
- In Indian boutique investment banks, one may have to start a bit lower at around INR 5-7Lakhs/annum or so and a lower bonus than the bulge bracket firms