What Is Equity Research? (Plus How To Establish a Career in the Field)

By Indeed Editorial Team

Published 8 September 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

When you have funds you want to invest, equity research can provide you with detailed recommendations on what to buy, sell or hold. Equity research is crucial in investment banks and hedge funds because it allows financial professionals to minimise the risk involved when investing their client's money. If you're considering a career as an investor, thorough equity research can safeguard your client's assets and help you build a solid reputation that can attract more clients to your services.

In this article, we discuss what equity research is, what an equity research analyst does, the key components of an equity research report and how you can establish a career in this field.

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What is equity research?

Equity research is a division in finance that conducts detailed market research and keeps track of various market trends to determine the best opportunities for investment. Professionals that specialise in equity research produce regular reports that help their colleagues make recommendations on the stocks their clients should buy, sell or hold. The goal of this division is to make a calculated assessment of the state of the market and to use this knowledge to grow their capital.

Since the stock market is highly volatile, the results of equity research aren't always perfect. However, thorough financial research and analysis can mitigate risk, especially considering the sizeable sums of money banks are dealing with. Thus, investment professionals that put an emphasis on equity research can earn their client's trust, whereby clients feel more comfortable granting another party the authority to manage their funds.

What is an equity research analyst?

An equity research analyst is the professional responsible for gathering market data, interpreting findings and forming conclusions on the most lucrative investment options. The analyst shares their report with other financial professionals, such as investment bankers, so that they can advise their clients on how to grow their money.

Often, equity research analysts work in a supportive role. They have a vast knowledge of the financial climate and can apply their analytical and critical thinking skills to make reliable market predictions. Equity research analysts that produce the most accurate reports are in high demand because they can shape the reputation of their firm.

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What does an equity research analyst do?

The following is a list of responsibilities that employers expect a potential equity research analyst to perform competently to get hired for a job:

  • Understand the company's goals, operating procedures and specific financial models

  • Collaborate with senior analysts and a team of associates to observe the trading activity of small, mid-sized, and large-cap companies

  • Scrutinise and project company financials by performing a valuation analysis

  • Synthesise data to generate new investment ideas

  • Apply data from multiple sources, including industry reports, trade journals and technical periodicals, to determine the reliability of any conclusions

  • Propose investment action to investment officers and account administrators

  • Communicate key findings and recommendations to the relevant team

  • Conduct assessment of environmental, social and governance (ESG) risks and opportunities

  • Develop industry, sector and company reports and presentations for internal and external clients

  • Manage client requests

  • Take part in industry and company-sponsored conferences and field trips

  • Stay up-to-date on market trends, business conditions and monetary policies that could affect the investment market

What are the key components of an equity research report?

An equity research report looks a lot like a research paper with several sections dedicated to describing the goals of the project, the research process, the included data and the practical implications of the report's findings. There are six key components of an equity research report. The following is a breakdown of the purpose of each section in the report:

1. Industry research

This section looks at the current state of the stock market. It contains detailed information on the trends and competition in the industry. Its goal is to give readers an overview of the current factors that are influencing the market's volatility and how it affects the risk for investors. Some analysts may use frameworks, such as a PEST analysis (politics, economics, social trends and technological innovation), to ensure they have scrutinised the market from all relevant angles.

2. Management overview

Investors want to know more about a stock than just its financial data. In order to achieve this goal, analysts use this section to describe the quality of a publicly listed company's management team. Descriptions about the company's vision and its latest developments can help readers make an informed decision on whether to invest in a company's future. This section is of great value to readers as it reveals the competency and reliability of a company's management team.

3. Historical financial results

This section aims to analyse the performance of a stock by comparing it with historical data and the analyst's own expectations. For example, a stock that has declined drastically to the surprise of the analyst might indicate a red flag. However, keep in mind that this process is more challenging than simply looking at a graph, as many other factors can impact a stock's financial results.

4. Forecasting

After scrutinising the current market climate and the performance of certain stocks, an analyst reveals their predictions about a stock's future activity in this section. When making their forecasts, analysts can take two distinct approaches, including:

  • Top-down approach: This style of forecasting uses data on the industry's size, growth and pricing to determine how much market share a company is likely to have.

  • Bottom-down approach: This style of forecasting uses data on the basic drivers of revenue, such as the number of customers or the number of units sold, to make predictions about its future revenue.

5. Valuation

In this section, an analyst uses their forecasts to discuss the valuation of a company. They may look at different sources of a company's financial data to come to an effective conclusion. For example, analysts may use the three statement model, which links a company's income statement, balance sheet and cash flow statement to form an accurate predictor of its current valuation.

6. Recommendations

In the recommendations section, readers can find advice on whether they should buy, sell or hold a stock. This is based on the target price analysts expect the stock to be at in a year's time. Since their recommendations are backed up by in-depth research, they are usually a valuable source of information for potential investors.

How to establish a career in equity research

A career in equity research can be highly rewarding if you enjoy working with numbers and are curious about market trends. Here's an overview of skills and experience you need to build a successful career in equity research:

1. Qualifications

You need a minimum qualification of a bachelor's degree to secure a job in the finance industry. As an equity researcher, you're responsible for analysing the stock market competently, therefore it's important that you earn a recognised degree in finance, economics or investment banking. Since these programmes are extremely technical in nature, the support of a professor and gaining hands-on experience through your coursework can help you build greater confidence in your expertise. Learning from case studies can refine your intuition about the stock market, teaching you valuable lessons in restraint and patience.

2. Key skills

As an equity researcher, it's important to have a combination of hard and soft skills. Computer skills can help you analyse sizeable sums of data quickly and efficiently. Many financial professionals also register for online investor portals that provide them with real-time data on the movement in the stock market and in-depth analysis from leading experts. Using a combination of these tools can ensure you produce quality reports with accurate findings.

Equity researchers also need to collaborate with others in their workplace, so possessing excellent communication skills so you can share your findings with portfolio managers clearly is beneficial. This way, they can minimise errors from miscommunication that might cost their investment firm millions. These professionals also need to work on their data analysis skills so that they can reduce instances of human error.

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3. Certifications

Most research professionals in the finance industry need to earn the Chartered Financial Analyst (CFA) designation. This extremely popular certification authenticates your analytical skills and your knowledge about government policies that regulate the industry. Sharing this certification on your CV can make you highly employable, as it allows potential employers to trust your judgement and recommendations.

4. Work experience

It's common for professionals to begin their career in equity research as an intern. This pathway exposes them to the several divisions in a bank, allowing them to develop a deeper understanding of where their talents reside. After completing your studies, you might find a job as a junior analyst, where you can use the opportunity to learn from more experienced colleagues and to train your intuition about the market. As you gain more experience and prove your forecasting ability, you can apply for positions with greater responsibility.

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