Fundamentals of Equity Research

Role of Equity Research

The role of Equity Research is to estimate the value of companies, provide analyzed information to the market in a structured form, and determine what drives share prices and then make investment recommendations. An efficient market relies on information, lack of information creates inefficiencies that result in stocks being over or undervalued. Equity research is valuable since it provides information analyzed by experts so that each individual investor does not need to analyze every stock.

Segments of Equity Research

Equity research can be differentiated into following segments

Equity Research by Investment banks and major brokerage firms

The investment banks and major brokerage firms generally focus on large-cap, very liquid stocks in their equity research. This is due to the fact that large-cap stocks generate very attractive and profitable investment banking deals. The companies which provide the opportunity for the equity research firms with bulk investment banking deals are the stocks are identified for tracking. Such analysis more often considers a stock’s long-term investment potential as secondary.

Equity Research by independent equity research firms

For majority of stocks, the primary source of information is the Equity research by independent equity research firms. However the quality of such reports remains questionable since equity research reports purchased from reputable sources may be inaccurate and misleading. Consequently investors have lower confidence on these equity research reports and are reluctant to buy the same.  While Institutional investors deploy their own analysts for research to gain better insight over other investors, they also appoint independent equity research firms for additional research. The amount institutional investors pay for these equity research reports may serve as indicator of the value such reports.

Fee-based Equity Research

In case of stocks where the Investment banks may not consider any research, Fee-based equity research provides market efficiency by covering the gap between companies and the investors who require equity research reports for free. As company has funded the Fee-based equity research, such reports provide information gets widely circulated free of cost to the reader. Fee-based equity research retains legitimacy with their professional and objective analysis of a company’s investment potential – the mandate for them is to provide analytical report and not promotional services.

Promotional equity research

As in the case of Fee-based equity research, the Promotional equity research is also funded by the subject company. However Promotional equity research is not un-biased and lacks dependability and neutrality. It is an analysis aimed at making an investment attractive to investors.

Purpose of Equity Research

The purpose of equity research is to identify the intrinsic value of an asset or security.

Equity markets are in general volatile due its direct relation with many other local and global dynamics involved. This volatility associated with the stocks make investing in equity shares or in equity markets a risky business. Equity research involves carrying out critical analysis to evaluate the fair value of stocks owned by a particular company. On a broader role it is also used to signify the possibility of growth or decline in share price of the company. The main objective of the analysis here is to find out trends by which decisions can be made to maximize returns from proposed investments.

Equity researchers with their competence and sophisticated mathematical modeling provide a better insight over the fluctuations of the equity market and aid in the investors in the process of achieving desired financial objectives. Hence using the tools of premium equity research reports and skills of a competent research analyst the investor is much better armed to make more prudent and informed investment decisions in the equity market. So equity research bears paramount importance and its findings by equity research analysts is carefully followed up by all stake holders right from large companies to individual investors who invest a part of their capital in the equity market.

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