Equity research is the study of a business and its environment in order to reach a decision about investing in the shares of that business. This research can also be used to determine if an existing investment in the equity of a business should be sold. Further, such research can be applied by an acquirer to a prospective acquisition deal, to determine the price at which to bid for the securities of a target acquisition.
Equity research can delve into many areas, but tends to concentrate on the following topics:
- 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.
- 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.
- 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. Include in these projections the likely impact on the firm's equity.
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.
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.