Financial research analysts are professionals who analyze financial data and information to provide insights and recommendations for investors, businesses, or financial institutions. Their primary goal is to make informed and data-driven decisions regarding investments, financial strategies, and other financial-related matters. These analysts may work for investment firms, banks, brokerage houses, asset management companies, or even independently.
The process of carrying out financial research involves several steps, which may vary depending on the specific area of focus (e.g., equity research, credit analysis, macroeconomic analysis). Here’s a general outline of how financial research analysts conduct their work:
- Data Collection: Analysts begin by gathering relevant financial data and information from various sources. This may include financial statements, company reports, industry data, economic indicators, market trends, and news reports.
- Financial Statement Analysis: Analysts carefully examine the financial statements of companies, such as income statements, balance sheets, and cash flow statements, to assess their financial health, profitability, liquidity, and growth prospects.
- Ratio Analysis: They calculate and interpret financial ratios to gain deeper insights into a company’s performance, efficiency, and valuation metrics. Common ratios include price-to-earnings ratio (P/E ratio), return on equity (ROE), and debt-to-equity ratio.
- Industry and Market Research: Analysts study the broader industry and market trends to understand how a company fits into its competitive landscape. This involves identifying potential risks, opportunities, and competitive advantages.
- Forecasting and Projections: Based on historical data and analysis, financial research analysts create financial models and projections to estimate future performance and potential outcomes.
- Valuation Analysis: In equity research, analysts use various valuation methods, such as discounted cash flow (DCF) analysis and relative valuation (comparables) to determine the intrinsic value of a company’s stock.
- Company and Sector Reports: Analysts compile their findings and insights into comprehensive reports. These reports may include investment recommendations, target prices, risk assessments, and key factors affecting the company or industry.
- Communication: Analysts often present their research findings and recommendations to clients, portfolio managers, or other stakeholders through written reports, presentations, or meetings.
- Continuous Monitoring: After making recommendations or publishing reports, analysts keep a close eye on the companies and sectors they cover to update their research and adjust their recommendations as needed.
It’s important to note that financial research analysts must adhere to ethical guidelines and avoid conflicts of interest to provide unbiased and reliable research. Additionally, regulations may vary by country or region, and analysts need to comply with any legal requirements and industry standards related to their research practices.
Research Analysts are defined by the nature of analysis they do, the coverage, and use of the recommendations they provide. Let us understand some of them:
Sell-side Analysts – They typically publish research reports on the securities of companies or industries with specific recommendations to buy, hold, or sell the subject security. These recommendations include the analyst’s expectations of the earnings of the company and future price performance of the security (“price target”). These analysts work for firms that provide investment banking, broking, advisory services for clients.
Buy-side Analysts – They generally work for money managers like mutual funds, hedge funds, pension funds, or portfolio managers that purchase and sell securities for their own investment accounts or on behalf of their clients. These analysts generate investment recommendations for their internal consumption viz. use by the fund managers within the organization. Research reports of these analysts are generally circulated among the top management/investment managers of the employer firms as these reports contain recommendations about which securities to buy, hold or sell.
Independent Analysts – They work for research originators or boutique firms separate from full- service investment firms and sell their research to others on a subscription basis. Their clients could be investors, institutions, investment bankers, regulators, stock exchanges, fund managers etc. They also provide customized research reports on the businesses on specific requests. The purpose of these reports could vary from investment activity to understanding competition to mergers and acquisition etc.