Equity research definition
/What is Equity Research?
Equity research is the study of a business and its environment in order to make a buy or sell decision about investing in its shares. This research can also be applied by an acquirer to a prospective acquisition deal, to determine the price at which to bid for the securities of a target company. Equity research can delve into many areas, but tends to concentrate on the topics noted below.
Financial Analysis
Calculate the various ratios associated with a company's financial statements and compare them on a trend line to determine the financial condition, financial results, and cash flows of the business. These results can also be compared to industry averages.
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Disclosures
Examine the disclosures that accompany the financial statements to see if there are any issues that could impact the future value of the company's equity. For example, a firm’s financial statements might disclose that there is a contingent liability that could bankrupt the company if it were to occur.
Industry Analysis
Review the key leading indicators that may predict future conditions within the industry where the target company operates, as well as the impacts of changes in the legal, regulatory, and competitive environment on that industry.
Projections
Combine the information in the company's financial statements with the projections and information gleaned from the industry analysis to arrive at projections for the next few years. This may involve modeling a variety of scenarios to see how they impact the company and the value of its shares.
Buy Side Equity Research
A person who engages in equity research may work for a buy side investment firm, and apportions his or her time between analysis work, preparing presentations for investment managers, and making the presentations. This job requires considerable financial analysis expertise, spreadsheet modeling skills, judgment regarding whether a possible investment should be recommended, and sufficient presentation skills to make a strong case either in favor of or against an investment.
Sell Side Equity Research
If an equity researcher instead works on the sell side, then the employer is probably an investment bank or research company, and the researcher will be expected to become an expert on an entire industry, within which research is conducted on a number of companies. This information is then packaged for use by the sales force to sell securities to customers. The researcher may make presentations directly to customers, and interact with the investment community in other ways, too. Thus, this tends to be a more visible role than that of the equity researcher whose work remains within a buy side firm.