Everything You Need to Know About Equity Research

1. What Is Equity Research?

Equity Research is necessary to both internal and external parties which require insightful investment ideas and recommendations. Using data collection and data analysis skills, and several other tools, a typical equity researcher in an investment bank performs tasks such as financial performance review, industry analysis, projections, investment recommendation, etc., which will be further elaborated in the following parts.

2. What Do Equity Research Analysts Do?

A person who engages in the equity research division can be called an equity research analyst or equity research associate. In sell-side equity research at an investment bank, the main work of an equity research analyst is to analyze small groups of stocks or public companies within particular industries or geographic regions. 

Based on these reports, the bank’s salesforce (the Sales and Trading division) can have a foundation for their investment pitching presentations and the bank’s traders shall make informed decisions on whether to sell, buy, or hold a particular stock investment. 

Their work process can be categorized into three main tasks: 

Step 1: Gather information

Equity research analysts in investment banks are responsible for keeping up with the most recent news that affects the stock markets. Both internal and external data should be researched and carefully analysed. Business information can be gathered from a variety of sources, including both public (Google, news, annual reports, etc.) and private (companies’ financial statements, site visits on “analyst days”, for instance) ones. 

Analysts must be able to keep an eye on and quickly digest the global economic condition, competitors’ activities and market price changes. They have to make sure that they cover all the dynamics in the industry, often using frameworks like “Porter’s Five Forces” or PESTEL analysis. 

Step 2: Analyze information

After doing enough industry research, equity research analysts will start analyzing the information they have gathered using different types of financial models, algorithms and screening tools. Some examples of Equity Valuation models are DCF, Relative Valuation, SOTP valuation, P/E EV/EBITDA methodology, while other handy metrics include: P/E Ratio, EPS, ROE, ROA, and more. 

After they are done with the analysis, ER analysts start the process of writing the equity research reports, which consist of market updates, analysis (economic, company, and industry analyses), and long thought pieces. Comprehensive and detailed examination of the data would be of great help to ER associates and analysts when it comes to the next step, making recommendations to market participants. 

Step 3: Make recommendations

An analyst’s job basically concludes at the report writing stage, where institutional clients will pay directly for these reports. However, junior equity research analysts in investment banks also spend a great deal of their time on building and managing relationships and generating market sentiment. Research professionals provide value by arranging meetings with investors to communicate new perspectives or developments which clients have never taken into account before.

3. Buy-Side vs. Sell-Side Analysts: What’s The Difference?

We have quickly gone through the basic job of an equity research analyst in an investment bank, which is the sell-side of the market. But what is the primary difference between the sell-side and the buy-side analysts? 

To put it simply, analysts working for the sell-side (investment banks) will carry out research on available data about several companies and industries in the market to give recommendation for the buy-side, while research analysts in buy-side institutions (hedge funds and mutual funds) conduct in-house research to align the investment opportunities with their own firm’s strategy. 

3.1. Buy-Side Equity Research Analysts

Buy-side companies like hedge funds, mutual funds and private equity employ research analysts to assist them in investment endeavors. Buy-side analysts determine how promising an investment can be and how it will fit the fund’s investment strategy and portfolio.

 The number of successful recommendations a buy-side analyst makes for their fund/firm will determine whether their performance is good or not. The research of buy-side ER analysts is not published and sold to other parties. 

Duties of a buy-side equity research analyst: 

• Research equity securities like stocks, bonds and derivatives, among others, for investment purposes. 
• Assess profitability of the investments and how well each investment corresponds with the fund’s investment strategy.
• Make presentations and present investment recommendations to the money managers of the funds. 
• Work closely with sell-side equity research analysts to keep up with investment opportunities and market updates. 

3.2. Sell-Side Equity Research Analysts 

On the other hand, sell-side equity research analysts lean towards “a universe” of stocks in one or two industries in order to give insightful investment ideas and tips. These tips are often referred to as “blanket recommendations” since they are intended for the whole customer base of the bank, rather than a specific client. 

Contrary to the buy-side analysts, professionals in the sell-side issue their periodic research reports in return for a fee. Besides, they also provide informal suggestions by communicating with institutional investors. 

Duties of a sell-side equity research analysts: 

• Keep up with and assess industry conditions, including the production and sale of financial assets and securities. 
• Evaluate and rank investments to recommend buying, holding, or selling. 
• Provide investment ideas to the bank’s salesforce and traders. 
• Meet with institutional clients and the general investment public to build relationships. 
• Work closely with buy-side analysts to review companies they cover and provide investment opportunities.

Generally, sell-side analysts have more public-facing duties. As their work is mostly consumed by outside firms, sell-side analysts must develop business ties to recruit and advise new customers. Buy-side analysts, on the other hand, have a more inward-facing role because they make investment decisions, manage the client’s money, and work hard to perfect the firm’s portfolio.

4. What Is an Equity Research Report?

Here are the typical components of a equity research report: 

• Investment recommendation
• Company/Industry background
• Investment thesis
• Catalysts
• Valuation
• Investment risks

The ER report can be considered a short, simple and “watered-down” version of a stock pitch (a summary of the potential of investing in a public company’s stock). The categorization of ER reports depends on the timing of their releases and their objectives and will be analyzed in the following part. 

4.1 Different types of equity research reports

Different types of equity research reports are:

• Initiation report
• Sector report
• Company Update/Company Note report

Initiation Report/ Initiating Coverage

As the name implies, these reports are prepared when the sell-side bank takes coverage of the company. Because this is the first time the brokerage bank has done any research, it is likely to be a lengthy study, ranging from 50 to 100 pages. This comprehensive report includes not only the details on the stock of the company but also information on competition, market dynamics, trends, and more.

Sector Report

The ER team at brokerage firms also provides the Industry or Sector report on a regular basis. These reports give deep insights on industry updates and important projections, which are highly beneficial to customers.

Company Update/ Company Note

Company Updates and Company Notes are the most common types of equity research reports. Sometimes, they can be two- to three page reports that emphasize important result updates, often released quarterly or annually.

 Another popular type is the flash report, which mentions significant events or changes that must be communicated immediately to clients. Important management changes, restructuring, mergers and acquisitions, or any deal announcement can all be considered occasions in need of a flash report.

4.2 Who are equity research reports for?

The majority of ER report readers are the institutional clients of investment banks. Clients include large investment funds like hedge funds, mutual funds, pension funds, life insurance companies, and foreign institutional investors. However, ER reports are also consumed by internal parties of the brokerage firm because it helps them make informed choices on what recommendation to give to covered clients.

4.3 Why do banks publish equity research reports?

Investment banks publish equity research reports to generate revenues from fees. Investors are likely to trade stocks of a company at the bank who publishes its stock reports. Moreover, when the bank does equity research analysis for an institutional client, that client is more likely to work with that bank to execute their stock trades. Either way, the bank is increasing commissions, leading to higher revenue.

5. Equity Research: Career Path

In equity research, the entry-level employee starts off at the associate position and stays for 2 to 4 years before advancing to the analyst level. Higher levels in the hierarchy include: VP-level analyst, senior VP-level analyst, and MD-level analyst. Career progression is basically the same as in investment banking, except for the fact that associate comes before analyst. 

A junior equity research associate’s main job is to research available data about companies and industries in the market, analyze them by using financial models built in Excel, provide and evaluate investment insights, write reports, and pitch ideas to analysts. The associate is also responsible for keeping an eye to new industry information like new government regulations or technological innovations, etc. Employees in junior positions tend to stick around for 2 to 4 years before getting promoted to the analyst level or moving to another firm. 

At higher levels of equity research, analysts take the responsibilities of managing a team of 3 to 4 associates. They are expected to take the lead in ensuring the quality of equity reports and deliver excellent customer service. Moreover, meeting up with big investors as well as maintaining relationships with C-levels of potential startups as well as top companies in the industry will also be part of the job.

6. Equity Research: Salary & Compensation

The average entry-level Equity Research Associates in major investment banks earn $150,000 in total annual compensation, 75% of which is made up of their base salaries. VP-level Analysts make around $200K – $300K a year, while the compensation for the Senior level might double to $600K. Finally, ER MDs can earn between $500,000 and $1 Million.

In general, there is a slight difference between the salary range of IB analysts and ER associates. While they essentially start with the same base compensation, on average, investment banking bonuses at the entry level are 10 to 50% higher than equity research bonuses. 

The reason for this difference in compensation is that the primary role of equity research is to support sales and trading activities and therefore doesn’t directly generate revenue for the firm. However, it’s undeniable that you can make a lot of money right when you first get out of school and swiftly move up the career ladder.

7. Equity Research: Working Hours

7.1. Equity Research Associates work 70 – 80 hours a week

Earnings season: This is the 3 week period that begins 2 to 3 weeks after the quarter ends. Equity research is busy with all the information provided by clients and companies on a quarterly basis. During peak season, an equity research associate may be required to work from as early as 5 in the morning till late night. Therefore, during the hot seasons, the workload can reach 15 to 16 hours per day.  

Normal days: During other periods of the year, the research associate may expect a significant reduction in office hours. They spend 10 to 12 hours a day working on non-urgent projects, conducting mid-quarter calls with management, maintaining financial models, etc. 

7.2. Equity Research Analysts work up to 100 hours a week

Earnings season: Working hours are technically the same as those of associates but analysts may be expected to put in extra hours on weekends. They spend most of the time working with investors/ clients. 

Normal days: Again, same with associates but analysts at higher levels typically devote one or two more hours of their day to work.

7.3. Some factors affecting working hours

Fridays

Fridays are the best for ER analysts! Office regulations are usually looser for Fridays since the stock market does not operate during the weekends. Trading volumes are lower, so equity researchers are less likely to receive as many requests from buy-side investors and traders. Therefore, they can easily get away arriving a little bit late and leaving early during Fridays. 

Deep dives and initiations

Deep dives and initiations are projects that result in the publication of a detailed and lengthy report for firms already under coverage or new firms. Working on these projects can be time-consuming due to the intricacy and depth of the report. That’s why, when working on these projects, the amount of office hours can reach 15, just like the hot season.

Analyst’s work style

A team usually consists of 1 analyst and 3-4 associates. So the workload of these associates depends closely on the analyst’s work style. If the analyst wants a deep, insightful report, associates tend to work for longer hours.

8. Equity Research: Exit Opportunities

8.1 Hedge funds/Asset management

Lots of professionals who work in the sell-side research would like to move to the buy-side institutions like hedge funds and other asset management firms. Due to the same amount of work and technical competence required, this is a reasonable exit option. 

To join a hedge fund or other asset management firms, an equity research analyst needs to brush up on other skills like portfolio building or awareness of current financial assets., etc. Remember, while working for a hedge fund offers a better lifestyle and an opportunity to invest, it is extremely competitive, even for professionals. Obtaining a CFA charter can help you to gain a comparative advantage over other applicants. 

Chance of landing an offer: Medium to High

8.2 Private banking

Another departure option is to work for a private banking organization that caters to a group of high net worth individuals. This exit option is ideal for anyone looking to take a break from the heated environment of both the buy-side and sell-side. To be considered for this position, an equity researcher must have excellent communication skills, a reputation in the industry and an understanding for the risk appetite of investors

Chance of landing an offer: High

8.3 Corporate finance/Corporate development

As an equity researcher, you might want to jump into the corporate environment. Working in equity research, over time, you will gain a detailed insight of a specific industry or company. This pool of knowledge you already have will play as an advantage when applying for the financial planning and analysis (FP&A) department at the corporate. 

Chance of landing an offer: Medium

8.4 Private equity/Venture capital

Last but not least, private equity or venture capital can be possible exits from equity research as well. However, breaking into PE/VC directly from equity research can be a challenge because PE/VC demands skills that you can hardly acquire from ER. Therefore, it is best that you transfer to Investment Baking to obtain valuable training and working experience before moving on to PE/VC.

Chance of landing an offer: Low

9. How To Get Into Equity Research

Now that you are familiar with the requirements and compensation of working in equity research, what do you need to do to land a job in this division? A position in ER might be competitive. Global investment banks and boutique firms only hire a small number of new ER associates each year. Taking this into consideration, we are going to provide a 4-step guide to help you increase your chances of getting employed. 

Step 1: Join research internship programs

Internships are the first step into the equity research land; however, they are super rare. Only 0.3% of all Investment Banking internships are research internship programs. If you want to break into ER, you will have to put in all your efforts and have a planned-out strategy for each opportunity. 

Some research internship programs you may be interested in are: 

• JP Morgan Chase & Co: Corporate & Investment Bank Equity Research Part-Time Analyst Internship
• Raymond James: Equity Research Associate Program, Equity Research Internship Program
• Barclay (Equity Research): Research Summer Analyst, Equity Research Summer Associate, Equity Research Summer Analyst
• Morgan Stanley (Equity Research):  Summer Analyst Program
• Goldman Sachs (Equity Research): Summer Analyst Internship, New Analyst Program.

Step 2: Build an equity research resume

Whether you are applying for the position of ER associate, ER analyst or any job for that matter, your resume plays a key role because this is when you first make an impression on recruiters. 

Your target is to make your resume stand out. To do so, you need to:

• Highlight your relevant working experience and achievements 
• Highlight your ability tailoring to that position you are applying for
• Share about your leadership experience and how you work with others in teamwork
• Personalize your objective statement to each of the bank/firm you are applying to 

Keep your working experience briefly within one page and share the rest of your story at the interview. After submitting your resume, don’t forget to confirm your application and stay connected with the firm, you will be notified about the next steps if you pass the CV round.

Additional note: To help you boost your profile when applying to ER roles, studying for the CFA and passing Level I can be of great advantage, especially if you come from a non-finance background and need to prove that you know the ins and outs of the financial world.

Step 3: Network past the screening round

To have an edge during the screening round, it’s best that you network and build relationships with people in ER groups. Get to know research professionals via LinkedIn or Email, and send your personal stock pitches, analyses, and other work to them. Otherwise, if you don’t have a strong background in investment banking or research and are still lacking in the working experience department, it’s likely that the automated screens will rule you out. 

Step 4: Complete the interview process

The questions in the interview of equity research (or sometimes called research interview questions) are quite similar to other jobs in Investment Banks. To become an equity research associate – the entry level research job, you can expect mainly 2 types of questions:

• Non-technical questions: including personal questions (strengths, weaknesses, past experience, goals) and industry perspective questions (global financial and investment trends, government policies, etc.).
• Technical questions: including analysis questions (financial statements, financial models, etc.) and situational questions. 

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