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Equity Research - An Overview of the Industry and How It Works
05 Jan 2023

By engaging in equity research, it is possible to understand the market in its current form and make educated guesses pertaining to its future trajectory. Without an understanding of the market, it is possible to incur several issues. Leading to a risk of Not investing in Equity Market. Of these, a misrepresentation of stocks is most likely – which means stocks are either over or undervalued and poor trading decisions can be made. Analysts who engage in equity research spend time understanding and analyzing varied stocks, the industry within which they operate and their competitors. By doing so they have a better understanding of a given company’s earnings and valuation. Analysts help traders bridge the gap that may exist between a company, what it states and its potential and current shareholders. Based on their recommendations, traders may make buy, hold or sell decisions. Equity researchers therefore make the online share market easier to navigate.

> Equity research involves an avid interest in, knowledge of and aptitude for understanding the following –

1. Financial Analysis – Historical financial results need to be examined with care and understood. Only a sufficient understanding will be able to clarify whether the actual historical results performed above, at or below market expectations. This is because each stock performs in a market based on reality vs expectations. By considering these documents against a trend line, a given company’s vitality, cash flow and growth potential can be determined.

2. Disclosures – Researchers look for potential issues that could adversely affect the company’s equity in the future.

3. Industry Analysis – Equity research requires a deep understanding of the trends that prevail in the industry within which the considered company operates. Additionally, knowledge on rivals who produce similar wares is a must. Changes within the legal, regulatory and competitive realms can have a large impact on the industry which is why they ought to be considered. Frameworks like Porter's Five Forces along with Political, Economic, Social Technological (or PEST) analysis are effective tools that can help with industry analysis. This is because they cover every aspect of a given industry including but not limited to the politics that govern it, economics, social trends and technological advancements. 

4. Understanding the Management – An understanding of a given company’s management team can be an incredibly useful tool for potential investors. Equity researchers play an important role in relaying the competency of a management team to investors. This information is vital as a good management team can add to the efficiency with which a company is run. Moreover, good management can help enhance a company’s vitality and sustainability. Equity researchers are able to assess management directly on a number of occasions including site visits.

5. Projections and Forecasting – This shows how a company will fare in the future based on its financial statements, industry analysis and the broader economy. Forecasting may be done from the top down or via a bottom-up approach.

6. Valuations – An extension of forecasting, this requires fluency in financial modeling.

Successful Equity researchers operate the share market today from either the buy side or sell side. Cash rich companies tend to form the buy side which is made up of institutional investors like pension funds, which seek to invest on behalf of their clients. Those operating within the sell side are employed within firms that create and market securities.

 

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