Goals of Equity Research
Holistic overview of Equity Research
As the financial markets have grown the demand for information in terms of research and analysis of companies has also accelerated. Investors rely on such information to determine what to put their money into, traders need information to know whether they should enter or exit a position, and corporate financiers (including bankers, private equity firms etc) need information to value companies and participate in transactions.
This information has to come from somewhere and as a result, there are entire divisions within financial institutions, brokerage firms as well as independent bodies who are dedicated on researching the key issues of companies and their shares – This function of research is called Equity Research, along with institutional research. The Equity research reports help in understanding market trends for better investment decisions.
Qualitative and Quantitative aspects of Equity Research
Qualitative research is by definition exploratory, and it is generally used when it is difficult to frame the problem or develop an approach to the problem. It is also used to go deeper into issues of interest and explore nuances related to the problem at hand. Qualitative equity research is a traditional approach largely driven by the analyst’s experience and insights. It involves subjective judgment based on non quantifiable information, such as management expertise, industry cycles, strength of research and development, labor relations, supplier base, customer profiles, brand equity etc. Qualitative information involves gaining an insight on business and industry dynamics.
Quantitative equity research is a financial analysis technique that seeks to understand trends by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically. Quantitative analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price etc.
In quantitative equity research, the sources of information are financial statements such as profit & loss statements, balance sheet, cash flow statements, schedules to accounts, etc.
Qualitative research and Quantitative analysis supplement each other for a proper in-depth research.
Equity Research in capital markets
Equity research is a discipline within the financial services industry. Equity research professionals are known as analysts; whose job is to discover, develop and communicate insights (coverage) of a particular company from a neutral position to enable the investment community to benefit by investing in it. The investment community consists of a broad spectrum of institutional professionals, asset managers, retail broker and individual investors. Typically, the research attempts to define at a particular moment the value, risk, and volatility of a (analyzed/covered) security or stock to assist investors in deciding to buy, hold, sell or monitor. Research analysts conduct due diligence, define technology platforms, measure comparables (similar or associated companies), define benchmarks and milestones for a target price as well as conduct quarterly reviews of financial disclosures, relevant industry news using trading, industry databases, management interviews and thereafter frame their observations and recommendations.
Equity research falls into two broad categories
- Provided by investment banks (I-Banks)
- Provided by independent equity research firms. I-Banks offer research multiple financial services including broking and corporate finance.