VARUN

How you can become

Equity Research
Analyst

“A Detailed Roadmap”
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.
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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? VARUN

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.
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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.
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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.
F. How much can you grow? VARUN

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.
 VARUN

2. How to Become an Equity Research

Analyst
A. Skill sets required

i. Education
To become 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.
ii. Extra courses (Professional certificates) VARUN

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.

The important thing is to keep your eyes and ears open and absorb as much as
possible.
iii. Internship VARUN

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 ‘hands-on’

guidance in the financial sector 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.
 VARUN

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 make 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
they 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.
 VARUN

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.
ii. Open to learning all the time VARUN

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, company annual reports, press releases,

reports on geopolitics, 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.
 VARUN

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.
 VARUN

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.
v. Avoid Conflict of Interest: VARUN

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.
C. What should his approach be? VARUN

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.
iii. Should try to answer ‘so what’ VARUN

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.
v. KISS – ‘Keep it simple and sweet’ VARUN

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 that everyone can understand. Do not

unnecessarily go for fancy words or jargon that 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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