Rimjhim Dubey

How to become
an Equity
Research
Analyst
“A Complete Guide”

Source: Finance Walk

1. Profiling an Equity Research Analyst

a. Who is an equity analyst?

An equity analyst is someone who studies and analyzes
financial information and trends for an organization or
an industry.
An ER analyst reviews stocks, bonds, and other
instruments and writes an unbiased, honest equity
research report.
He studies public records of companies to forecast the
organization’s impending financial needs.
He writes reports on the organization’s finances and
defines the business’s investment potential by giving
ratings, like buy, sell, or hold.
He is also accountable for analyzing the budget and
making a strategy to get out of debt if the organization
is in a poor financial state.
He typically uses technical analysis or fundamental
analysis to report, which securities or stocks are
expected to be profitable and which are not.
In conclusion, he helps his clients in making good
investment decisions based on his reports.

Rimjhim Dubey
b. What work do you have to do?
As an equity analyst, your work would typically include reviewing of
the annual statements (the balance sheet, the profit and loss
statement, the cash flow statement, the notes to accounts, etc.),
revenue figures and future projections, intelligence concerning key
clients, amount of debt the company is carrying, any legal liabilities,
present market trends, and the products or services presented by the
firm.
After studying all this in detail and analyzing the data, you will have
to prepare a crisp but detailed ER report, which will help your clients
make optimal decisions about their investments.
The majority of your time will be spent on research. The rest of your
time will be spent on modeling and report writing.
It might take some time upfront to build financial models in the first
place but once you are done with it you just make minor tweaks and
appraise it for earnings announcements and significant channel
checks.
In a typical hedge fund or asset management firm you have 1 head
person taking the decisions and everyone else below him/her
implementing and trying to come up with different ideas.
There is a quasi-mid-level where you could have senior analysts and
then just analysts, but it’s much less categorized than say, Investment
Banking.
Equity research is more about how good you are at servicing clients
and giving insightful ideas – here we don’t need an assembly of
people as you do with Mergers & Acquisitions deals.
There are usually 2 – 3 Associates and 1 Senior Analyst on each
sector/industry team – so if we’re covering 20 companies, each
associate might be covering about 5 companies.
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c. Where can you work?

As an equity analyst you would typically work in a brokerage house,

securities firm, ER firms or investment banks, commercial or retail
banks, NBFCs (non-banking financial corporations), insurance companies,
mutual fund companies, pension fund companies, or other such
companies.
As an ER analyst, you will have to work on both the sell-side as well as
the buy-side.
As a sell-side analyst, you will typically work at an investment bank or
with an independent research company, whereas as a buy-side
researcher you typically will be working with hedge funds companies or
financial management companies.
On the sell side, your research will be motivated by stock or share
performance and you will have to develop cash-flow models and
earnings of the organizations you follow in a particular sector or
industry.
On the buy-side, you will most likely follow some 20 to 25 organizations
in two to three industries or sectors.
Here, you will have to focus more on providing relevant intelligence to
various portfolio managers who take care of investments for the client.
ER analysts can find jobs through professional recruiters or job
consultants who typically specialize in recruiting in investment banks,
private equity, and industry.
Job bulletins and classified advertisements are supplementary methods
for finding appropriate jobs in this field.
What prospective employers really seek is for your intangible skill sets to
be made tangible.
This realization should empower you significantly because, with this
framework, you can concentrate on giving concrete proof that you have the
skill set required for being an effective and good analyst.
Rimjhim Dubey
d. How to give a good interview and get a job.

When applying for jobs with these investment banking firms, remember that
while covering letters for your resume might be just a procedure for some
other jobs, here they’re a reflection of your writing abilities.

Don’t underestimate the importance the company’s Human Resources will

give to them.

In addition to the standard Human Resources generated interview questions,

be ready to speak about stocks you like and explain why you like them.

Frankly speaking, remember one important thing – The stocks you choose
don’t matter as much as the thought process behind the choice, and what
explanation you provide.

You will have to be able to portray a stock in a way that validates sound
thinking and an effective thought process.

After all, your prospective job revolves around which stocks you choose to
pick and talk about.

Also, be prepared to talk about your opinions on the capital markets and
related current topics.

Remember to have a view in everything you say but do not be indecisive, and
don’t act like a ‘know-it-all’ either.

Organizations are also looking for those candidates with rational curiosity:
people who want to understand every minute detail about an organization or
industry and the implications on their customer’s portfolios.
Rimjhim Dubey
e. How much can you earn?

The average emolument for a typical equity research analyst in the

USA is around USD 70,000 to 100,000, while the top ER analysts
can earn more than USD 160,000 a year, according to the U.S. BLS
(Bureau of Labour Statistics). These numbers include only salary,
and not bonuses, benefits, or perks.

Bonuses usually depend on how profitable your company or your

team was during the year, plus some performance element
measuring how well your stock picks did for the year.

Ranges of base salary can vary widely from company to company,

but the average bonus in a typical year is in the range of 25% to
50% of the base.

When it comes to overall earnings an entry-level ER analyst or

associate can earn anywhere from USD 80,000 and USD 250,000.

Senior employees such as vice presidents or senior managers can

make somewhere in the range of USD 500,000 to USD 750,000,
while very senior people like partners or managing directors can
make anywhere between USD 800,000 to USD 1.5 million.

Star analysts have been known to take home literally USD 3 million
or USD 4 million a year based on their success.

Rimjhim Dubey
f. How much can you grow?

Advancement typically comes when you leave to join another

organization and they promote you, or when you leave to go start
your own firm.

Senior Analysts have cozy jobs and few leave readily – but if you
do happen to leave and you’re well-respected in the industry, you
might get an opportunity to cover your own names.

And if you are able to build a good standing among investors,

someone else might just hire you – whether it’s another
investment banking firm.

Many times analysts have a difficult time progressing as they

tend to bury themselves in Excel sheets all day long– but that’s
not the correct approach as no one cares how fancy or elaborate
your model is.

Your clients will only care about how insightful your thoughts and
suggestions are and how much they understand, like, and trust
you.

So you need to get out of the bubble and go out in the industry
to meet real people, shape up a reputation, and make worthy
decisions if you want to advance in this segment and become a
senior equity research analyst.

Rimjhim Dubey
2. How to Become an Equity Research
Analyst

a. Skill sets required

i. Education
For becoming an ER analyst, you should typically have a
bachelor’s degree, master’s degree, or a diploma in
finance, business administration, or accounting from a
reputed university.

Further skill sets required to flourish in this career

include good communication skills (both written as well
as spoken), an analytical mindset, decisive thinking, and
excellent research skills.

If you can combine both – excellent communication,

financial analysis, and data analysis skills effectively, you
can be very successful in this field like many equity
research analysts.

Rimjhim Dubey
ii. Extra courses (Professional certificates)
Apart from your formal education, for most equity research analysts, it is always a
good idea to explore other avenues wherein you can enhance your technical
knowledge.

There are various additional professional training courses where you can attend
either classroom sessions or virtual classrooms where you can hone your equity
research skills and learn various new techniques.

Most of these training courses cover the basics of equity research report writing
such as – assessing industry attractiveness, financial modeling, equity valuation
techniques, and equity and investment report writing.

Professional certification will seriously increase your chances of getting

employment as an equity analyst after completing a formal graduate degree
program.

There are institutes such as the CFA Institute that offer the Chartered Financial
Analyst credential to contenders who meet the educational necessities and pass
three exams.

The exams cover markets, financial accounting, securities analysis, economics,

portfolio management, corporate finance, and asset valuation.

Apart from formal education and extra courses, a very important aspect of your
learning will be ‘On the job’ training.

You will almost immediately find yourself interacting with portfolio managers,
hedge fund managers, the company’s internal salespeople, and traders, as well as
communicating the senior analyst’s investment theory after the organization
reports its financials.

Important thing is to keep your eyes and ears open and absorb as much as
possible.
Rimjhim Dubey
iii. Internship
A formal graduate degree program might provide the candidate
with a chance to complete an internship with a professional
investment firm.

These internship programs offer the candidates with ‘hands-on’

guidance in the financial sector and particularly equity analysis.

Employers and other research associates when making recruitment

decisions for equity research jobs definitely prefer internship
experience in other companies.

A good and successful internship stint can give a lot of ‘on-the-job

experience’ and confidence to fresh analysts and can lead to good
employment opportunities after finishing their formal MBA
program.

This is also why those without any kind of experience in investment

banks find it difficult to get hired for research analyst jobs.

I would really insist that all beginners (with no investment banking

equity research experience) should always try to seek internships
with good and reputed organizations where they can learn new
skills and also hone their existing skills.

Rimjhim Dubey
iv. Understanding of the industry and economy
As an ER analyst, you will have to continually identify and analyze
financial information, strategic issues, and trends that affect
companies, industries, and markets on a local and universal scale.

You will have to analyze macro factors, various sectors or industries

as well as the organizations’ financial results to recognize investment
opportunities.

These insights and investment ideas will be used by the readers of

your report to develop their strategies and take investment decisions.

Since ER analysts typically focus on a small set of stocks (5-20) within

select industries or geographic regions, they become specialists in
those specific companies and industries that they evaluate or follow.

Analysts need to comprehend everything about their ‘coverage land’ to

give investment endorsements.

Equity research analysts must be conversant with the business

regulations and regime policies within the country to decide how it
will affect the market environment and business in general.

The more you understand the industries in detail, the easier it will be
for you to decipher market dynamics.

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b. The attitude he should have to work as a research associate:
i. Patience
One of the most underrated traits for being a good equity research associate is
patience!

Remember haste makes waste.

Your customers trust you and will be basing their buy-sell decisions on your
recommendations.

You have to make sure that you do not rush into things but ponder every small
detail and try to decipher every tiny bit of intelligence.

You will have to meet various industry participants to talk to them and understand
the pulse of the market.

Remember these are professionals and will always be busy. It might happen that
even after giving you appointments, they might cancel them due to impending work
or meetings.

They might postpone meetings and make you wait for hours together.

But remember that speaking to these experts can give you that edge when you are
writing your equity research report.

So you need to pull in all your patience and make sure you don’t divert from your
course. If you are persistent and patient, you will be able to eventually get all the
interviews you are looking for and add value to your equity research reports.

You will also need all your patience when you are building equity research models.

These models can go from a single sheet to multiple sheets. You will have to link
numerous cells and add multiple formulae to create your final model.

Rimjhim Dubey
ii. Open to learning all the time
Again it might sound very generic if I say that you need to be open
to learning all the time. But believe me, life is all about learning
every day.

You have to keep your eyes and ears open all the time and absorb as
much as possible.

Another important tip is to read, read, read and read some more.

Read investment reports, read company annual reports, read press

releases, read reports on geopolitics, read reports on mergers and
acquisitions, read reports on the economy.

In short, read anything that sparks your curiosity, even fiction novels
…It’ll help you ignite your mind and thinking out of the box
capabilities.

Also, read the daily news and that too from as many sources as
possible every single day.

Also, you should start to develop a view of the news and how it
affects various organizations, industries, businesses, countries, and
even individuals.

The most significant skill set for any ER analyst is to understand

and decipher the information. The analyst who can understand
intelligence the best and act decisively on that intelligence wins the
day. Rimjhim Dubey
iii. Understand the subject properly – go into the depth of the
matter
For you to provide a recommendation or a direction based on
your findings, you will have to be very certain about it.

You’ll have to be able to argue your case soundly for a

valuation, in clear and concise terms that your customer can
understand.

You need to understand the subject properly and really get

into the depth of the matter.

Remember shortcuts will never help you in the long run.

You have to make sure that every statement that you provide
in your report has a ‘why’ and ‘so what’ element attached to
it.

The reader should be able to understand very clearly what

you have proposed and what would happen if he follows your
direction.

Rimjhim Dubey
iv. Verify every piece of information you get
The one thing that is required of you is to be able to
establish a passion for investing.

Once you have that passion, you will make sure that
whatever you present is of utmost quality and integrity.

To do so you have to make sure that every piece of

information that you gather is verified from reliable
sources.

Speculation and rumors have no place in this research

or rather in any type of research.

You will be collecting intelligence from various sources,

so you’ll have to be careful about the quality and
authenticity of the source of the information.

It is always better to specify the source of information

in your report to add validation to your intelligence.

Rimjhim Dubey
v. Avoid Conflict of Interest
Conflict of interest can be a major concern in equity
research.

Many research firms that create equity reports for their

customers are also investment firms, aggressively selling
the same shares to them.

This activity makes it very hard to believe that the

intelligence provided is completely free of bias.

Hence you have to be very careful that there is no real

conflict of interest, and if there is, you have to make sure
that it is clearly specified in the report.

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c. What should his approach be?
i. He should be Unbiased
You should make sure that the contents of the equity research report
should be unbiased.

It should not be partial towards any particular company or a business

house.

You have to remember that a lot of people will be making investment

decisions based on your reporting.

They trust you and your reporting and you are obliged to provide them
with an unbiased opinion.

The more trust you can build with your readers, the more they will
vouch for your reports.

ii. Detailed as possible

While writing ER reports, presume that the person who reads is new
to the company and he does not have any knowledge about its
business.
So, your report should include extensive information about the
company, its products, key statements, its management, current
market dynamics, future strategies of the company, growth estimates,
and the probable risks faced by the organization.
You have to make sure that the information you present is detailed
and covers all the above elements properly.
You should not leave any questions unanswered and the reader should
not have to go looking for extra information after reading your report.

Rimjhim Dubey
iii. Should try to answer ‘so what’
The biggest mistake that most analysts make is just stating the
facts in the reports. You have to remember that you are not a
reporter but an analyst. The reader expects answers from you – not
news!

They want you to give them direction. So you have to make sure
that every piece of information you give, has a ‘so what’ attached to
it.

For example: Just saying that ‘Company X will have a higher debt-
equity ratio in the future as it is planning to take a huge long-term
loan’ is not enough.

You have to tell the reader, what will happen because of this.
According to you, is this a good strategy for the company or not?
What effect will this have on the future revenues and share price of
the company?

iv. Consider all the risks applicable

Every ER report should include current and future negative sector
and organization happenings that might cause a danger to the
investment decision.
Risks can be of various types – operational, financial, economic or
connected to legal issues or regulatory procedures.
Though companies are obligated to disclose all the risks which could
affect them in their statements, risks are many times subjective
and difficult to quantify.
Rimjhim Dubey
v. KISS – ‘Keep it simple and sweet’
This is the ‘Age of Minimalism’. So always remember the principle “less
is more”.

This does not mean that you just give a brief snapshot, but explain the
concept properly for the reader to make up his mind about the
economic strength of the organization.

It means giving precise and relevant intelligence which will assist the
reader in quickly comprehending the organization’s money health and
take calculated decisions.

vi. Write in such a way that the reader understands clearly

Use simple language which everyone can understand. Do not
unnecessarily go for fancy words or jargon which will send your
readers running for a dictionary.

You should keep your sentences brief for the same reason you should
keep the paragraphs short – they’re easier to read and comprehend.

Pick up any newspaper and observe the writing – you will see short
paragraphs everywhere.

They do that to make reading easier, as your brain absorbs information

better when it’s divided into small parts.

Every sentence must have one simple thought. More than that creates
complications and invites uncertainty.

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