Why I Chose Equity Research As a Career

[magellan1]

Equity research is the process of analyzing the business and financial performance of companies to make investment recommendations or investment decisions. The main institutions that conduct serious equity research are investment banks (sell-side) and investment firms (asset managers, hedge funds, pension funds, etc). However, there are a number of smaller players like independent research platforms (fintech companies), individual investors and financial advisors that also conduct equity research.
The main goal of equity analysts is to evaluate the future prospects of companies and to predict correctly the future stock prices of those companies. Stock analysts usually develop industry expertise, read financial reports, attend conferences and talk to company management/investors to gain a deeper understanding of specific companies or sectors. I have heard some analysts saying that this is one of the best jobs in the world because one get’s paid for learning about companies.
Analysts who work at investment banks have several key responsibilities. Firstly, they need to attend earning calls and obtain valuable information about their companies or industries. Secondly, equity researchers need to write and publish reports on the companies that they cover. Thirdly, they need to make investment recommendations (Buy, Sell or Hold) and set target prices. For example, the stock price of Apple at the moment is 172.69 and based on my analysis I expect the price to go down to 140 in the next months (this is not investment advice). As an analyst covering tech stocks, I would give Apple a Hold or even Sell rating depending on my conviction level with a target price of 140. Sell ratings are quite rare and analysts tend to give Hold ratings even if they have a bearish view of a company. Finally, analysts need to talk with traders, salespeople, clients and express their views.

A typical day of an equity analyst looks like this:

06:00 am - Wake up (I know that it is quite early)
07:00 am - Arrive at the office and read the most important news
07:30 am - Participate in the morning meeting with traders salespeople and other analysts
08:30 am - Answer emails from clients and colleagues from other teams (Sales & Trading)
10:00 am - Go for a coffee and catch up with colleagues from the same team/department
11:00 am - Get economic and financial data/reports. Read, analyze them and start crunching numbers
1 pm - Go for lunch
2 pm - Receive some urgent tasks from your boss (prepare some tables, spreadsheets, etc)
3 pm - Do financial modeling and write research reports
7 pm - Leave the office
7:30 pm - Meet friends for dinner and drinks
10 pm - Go home and get ready for the next day

The typical schedule looks very different during earning seasons because analysts need to attend earning calls, produce and update many reports. The working hours increase significantly at the expense of one’s social life. There is no need to work on the weekends unless one has important work that he/she didn’t finish during the week. I went to the office on weekends a few times and I always encountered the same people. Most of the time, they didn’t have any important work to do but they didn’t have social life or very afraid of losing their job.
Earlier this year, I published another post on the pros and cons of working in equity research. You may find it useful if you are considering becoming an equity analyst. Here is the link:
https://www.canarywharfian.co.uk/threads/why-equity-research-is-a-great-career.707/

I like equity research but sometimes I feel that the pace is too slow because one needs to read and analyze a lot of information. Moreover, it is not easy to evaluate the impact of one’s work. For instance, one might wonder whether 100 or 0 clients have read his/her report and whether they benefited from his work or not.

I hope that there are other people who have worked in equity research on this forum and I would love to hear your experiences.
Did you enjoy the good work-life balance (compared to M&A, DCM, etc)?
Do you think that analysts add value or markets are efficient and the world doesn’t need them?​

 

[JustAnotherHuman1]

Thanks for this, a neat summary and quite informative. A few questions: why did you choose ER over banking as a career? Was it the friendlier hours or something else? Also, do you still work in this industry?

Why do you not give a red signal, if you believe it should be red? You mention this but not the reason for it. Is it just the case of only giving a negative rating if the outlook is substantially negative, but not otherwise?

I assume you need good communication skills in order to interface well with other people in the business and stakeholders, especially traders?

What are some exit opportunities for ER analysts?

 

[magellan1]

Good questions, thanks for asking.
1. Why equity research?
Firstly, I think that my personality is more suitable for equity research than IBD. I did a couple of spring weeks and I had no idea what Equity Research was but even then the HRs were pushing me indirectly toward the research departments - I had the chance to spend time with people from research teams.
On one of the occasions, I shadowed an MD at a French Investment bank focusing on Credit Research and I had to do a case study/assessment with him. I remember that the company in question was EDF France. It was facing a lot of challenges and the MD was asking me whether it was a good idea to invest in the bonds at that time or not.
Secondly, I started investing in stocks during the first semester of my undergrad and got very interested in this activity.
In addition to that, I wanted to try something different (not IBD) and did not want to work crazy hours.
Currently, I don't work in equity research officially but I invest actively in equities and research stocks regularly.

2. Why not give sell ratings?
The most important reason is that a lot of times the companies that analyst cover are also clients of the same banks. For instance, I could work for JP Morgan and cover General Motors and believe that the stock of the company is significantly overvalued but at the same time, GM uses JP Morgan for raising debt financing (generating a lot of fees for JP Morgan). If I were to publish a report saying that the fair stock price of GM is 30% lower than the market price, there is a high probability that General Motors will not hire my bank again for other transactions.

3. Do equity analysts need good communication skills?
Yes, good communication skills are required to convince your clients that your call is correct but I believe that networking skills are even more important, You need to get valuable information that others don't have or get it before them in a legal way.

4. What are some exit opportunities for ER analysts?
The most common exit opportunities are:
- Moving to the investment team of one of your clients (Pension fund, Sovereign Wealth Fund, etc.)
- Joining one of the companies that you cover (Investor relations or Finance department)
- Switching to a competitor (e.g. from JP Morgan to Goldman Sachs)​

 

[JustAnotherHuman1]

Cheers

1. How is this going? Are you beating the market at all? It’s useful to have that professional industry experience that other retail investors probably don’t have.

2. The conflict of interest is real and credit rating agencies did the same before 08, right?

3. How does this work exactly? For any info to be valuable it needs to be material and non-public?

4. I thought hedge funds are a big destination, at least for best ER analysts that is

 

[magellan1]

1. I have won several investment competitions but the performance of my portfolio is worse than the market because I made several mistakes that became a big drag on my overall performance. For example, I invested in a Mexican lender with poor accounting standards that defaulted on its debt and the shares became worthless (Credito Real). The good thing is that I made a lot of mistakes early, so I have plenty of time to benefit from the lessons learned.
2. There are conflicts of interest everywhere - banks, auditors, credit agencies, etc.
3. The market usually reflects the average investor who can easily be wrong. You can make better investment decisions if you hear that there is a high probability of a change in regulations, portfolio rebalancing of the biggest investors in a company or other valuable information from your friends.
4. The best analysts have many options because they are few.

 

[HowardM1]

I'm interested in how MiFID II has impacted your area, particularly in terms of research from banks. MiFID II, or the Markets in Financial Instruments Directive II, is a legislative framework instituted by the European Union intended to regulate financial markets in the bloc and enhance protections for investors. Its goal is to standardize the regulatory disclosures required for particular markets, products, and services, aiming to increase transparency and reduce potential conflicts of interest.

Under the previous system, research, particularly single stock equity research, was often funded through so-called "soft commissions." The more a client traded with a bank, the more virtual credit they received, which could be used for research or company access.

However, this has changed significantly under MiFID II. Firms are now required to budget separately for research, meaning they must pay directly for research services rather than receiving them bundled into transaction fees. In the UK and Europe, asset managers and hedge funds now pay hard cash for research, leading many to become more selective about who they receive research from and its quality.

As a macro investor, I never use single stock equity research, but I do consume economic, market, and policy research. I've found that, except for a few large banks like GS and JPM, I'm almost always better off going to a dedicated independent research provider due to these changes brought about by MiFID II. I'm curious about how you perceive this from your perspective.

 

[JFH1]

As a former fund manager I can say that I did find analyst reports useful. I didn't necessarily follow the recommendations, but the (usually) in depth analysis of the company was always helpful in getting under the bonnet of the business. Most analysts are fixated on their ratings, understandably, as they affect their employment and earnings opportunities, but I was always a bit wary of "star" analysts who could be a bit publicity hungry, preferring a thorough, dependable but unflashy approach. This was all pre MiFID, and I would, like HowardM, be interested to hear views from current analysts on how their roles have changed and what the employment and pay opportunities are like in the current environment. I think it is a role that suits a certain type of person - I have heard analysts referred to (usually by the salesman who was bringing them in to see me) as a "brain-on-a chain" which may have been meant disparagingly, but I think is actually something of a compliment and a reasonable description of the mentality required to be good at the job.

 

[JFH1]

1. I have won several investment competitions but the performance of my portfolio is worse than the market because I made several mistakes that became a big drag on my overall performance. For example, I invested in a Mexican lender with poor accounting standards that defaulted on its debt and the shares became worthless (Credito Real). The good thing is that I made a lot of mistakes early, so I have plenty of time to benefit from the lessons learned.
2. There are conflicts of interest everywhere - banks, auditors, credit agencies, etc.
3. The market usually reflects the average investor who can easily be wrong. You can make better investment decisions if you hear that there is a high probability of a change in regulations, portfolio rebalancing of the biggest investors in a company or other valuable information from your friends.
4. The best analysts have many options because they are few.

On point 3, I would just like to sound a note of caution - "valuable information from your friends" can easily be inside (ie non-public) information, which - if acted upon - can result in big fines or imprisonment. This is, not surprisingly, career death and to be avoided at all costs.

 

[JFH1]

Good questions, thanks for asking.
1. Why equity research?
Firstly, I think that my personality is more suitable for equity research than IBD. I did a couple of spring weeks and I had no idea what Equity Research was but even then the HRs were pushing me indirectly toward the research departments - I had the chance to spend time with people from research teams.
On one of the occasions, I shadowed an MD at a French Investment bank focusing on Credit Research and I had to do a case study/assessment with him. I remember that the company in question was EDF France. It was facing a lot of challenges and the MD was asking me whether it was a good idea to invest in the bonds at that time or not.
Secondly, I started investing in stocks during the first semester of my undergrad and got very interested in this activity.
In addition to that, I wanted to try something different (not IBD) and did not want to work crazy hours.
Currently, I don't work in equity research officially but I invest actively in equities and research stocks regularly.

2. Why not give sell ratings?
The most important reason is that a lot of times the companies that analyst cover are also clients of the same banks. For instance, I could work for JP Morgan and cover General Motors and believe that the stock of the company is significantly overvalued but at the same time, GM uses JP Morgan for raising debt financing (generating a lot of fees for JP Morgan). If I were to publish a report saying that the fair stock price of GM is 30% lower than the market price, there is a high probability that General Motors will not hire my bank again for other transactions.

3. Do equity analysts need good communication skills?
Yes, good communication skills are required to convince your clients that your call is correct but I believe that networking skills are even more important, You need to get valuable information that others don't have or get it before them in a legal way.

4. What are some exit opportunities for ER analysts?
The most common exit opportunities are:
- Moving to the investment team of one of your clients (Pension fund, Sovereign Wealth Fund, etc.)
- Joining one of the companies that you cover (Investor relations or Finance department)
- Switching to a competitor (e.g. from JP Morgan to Goldman Sachs)​

On the issue of buy/hold/sell recommendations you are of course quite correct - it is a relationship minefield for banks looking to serve investors and their corporate clients at the same time. In reality, I think most investors know how to read between the lines - after all, why would you want to invest (or remain invested) in a stock which is only rated as a "hold"? Some banks try and get around this by using different terminology (such as outperform/underperform - terminology which also implies that the analyst is expected to consider performance relative to the market, not just in absolute terms), others use complex ratings systems that consider the time horizon (short/medium/long term) and may also add measures of perceived risk - personally I used to find these unnecessarily complex and increasingly unhelpful. In reality, the analyst would always tell you what they really thought, even if they were wary of committing it to print for relationship reasons.

 

[magellan1]

I'm interested in how MiFID II has impacted your area, particularly in terms of research from banks. MiFID II, or the Markets in Financial Instruments Directive II, is a legislative framework instituted by the European Union intended to regulate financial markets in the bloc and enhance protections for investors. Its goal is to standardize the regulatory disclosures required for particular markets, products, and services, aiming to increase transparency and reduce potential conflicts of interest.

Under the previous system, research, particularly single stock equity research, was often funded through so-called "soft commissions." The more a client traded with a bank, the more virtual credit they received, which could be used for research or company access.

However, this has changed significantly under MiFID II. Firms are now required to budget separately for research, meaning they must pay directly for research services rather than receiving them bundled into transaction fees. In the UK and Europe, asset managers and hedge funds now pay hard cash for research, leading many to become more selective about who they receive research from and its quality.

As a macro investor, I never use single stock equity research, but I do consume economic, market, and policy research. I've found that, except for a few large banks like GS and JPM, I'm almost always better off going to a dedicated independent research provider due to these changes brought about by MiFID II. I'm curious about how you perceive this from your perspective.

I don't work in the equity research department of a bank anymore but I can share some observations and thoughts.
Firstly, I was doing equity research at the time of the introduction of MiFID II and my bank was reducing the intake of new analysts. There were some people leaving the firm for personal reasons and it was unclear whether the bank would hire somebody else to take over their responsibilities.
Secondly, I think that MiFID II will gradually reduce the number of analysts working at big banks but at the same time, it will allow smaller independent research firms that deliver high-quality work to grow.
Thirdly, buy-side firms now have a stronger incentive to build research teams in-house.
Fourthly, MIFID will improve the industry by making it more clear whether funds are really generating value or just leveraging the research of other firms.
Finally, AI and ChatGPT are also affecting seriously this profession and reducing the need for equity analysts. Now, it is possible to use ChatGPT to conduct a superficial analysis of a company's income statement or balance sheet.

P.S. MiFID II is not applicable in all jurisdictions (outside the EU) and some financial institutions continue operating in the same way as they did in the past. It remains to be seen whether all countries will embrace it or it will remain mostly a European regulation.

 

[HowardM1]

I don't work in the equity research department of a bank anymore but I can share some observations and thoughts.
Firstly, I was doing equity research at the time of the introduction of MiFID II and my bank was reducing the intake of new analysts. There were some people leaving the firm for personal reasons and it was unclear whether the bank would hire somebody else to take over their responsibilities.
Secondly, I think that MiFID II will gradually reduce the number of analysts working at big banks but at the same time, it will allow smaller independent research firms that deliver high-quality work to grow.
Thirdly, buy-side firms now have a stronger incentive to build research teams in-house.
Fourthly, MIFID will improve the industry by making it more clear whether funds are really generating value or just leveraging the research of other firms.
Finally, AI and ChatGPT are also affecting seriously this profession and reducing the need for equity analysts. Now, it is possible to use ChatGPT to conduct a superficial analysis of a company's income statement or balance sheet.

P.S. MiFID II is not applicable in all jurisdictions (outside the EU) and some financial institutions continue operating in the same way as they did in the past. It remains to be seen whether all countries will embrace it or it will remain mostly a European regulation.

Thanks, I do agree with your observations. It's not just equity research that's challenging; the same holds true for all types of research. I know many macro research professionals at various banks who are finding it tough. Those who leave usually aspire to join the buy-side or establish their own venture, but the independent research space is also highly competitive. Long-standing veterans dominate the field, making it difficult for newcomers to break in.

I concur that once you've paid for something, your interest in its value significantly increases. The amount of research thrown at a top-tier client is overwhelming; it's virtually impossible to read it all, especially prior to the implementation of LLMs. This situation has forced companies to give serious thought to what they truly value.

I believe LLMs and other AI technologies will have a major impact on research. Not only can they assist in producing research, they can also enhance our interaction with it. For instance, if you train an LLM model on macro research data, you can ask it complex questions about specific bank opinions, comparisons, credibility assessments, and predictions based on collective research. You could even request trade recommendations based on the model's most probable scenario and your risk guidelines. So instead of eliminating researcher roles, I think these technologies may cause strategists to lose sleep. Perhaps a team of five could be reduced to three who effectively leverage AI. But that's a whole other discussion, I suppose!

As for MiFID II, you're correct that it's an EU law. However, I'm aware that the US is considering similar regulations regarding payment for research. My previous company was preparing its US operations for this change.