Equity research: Definition, responsibilities, career opportunities

An accurate valuation is one of the critical factors behind a successful deal, according to Statista’s survey of US executives. That’s why equity researchers play such a crucial role in assessing a company’s value and making recommendations for investors.

In this article, we delve into the basics of equity research, explain how it works, look at career opportunities in the equity research sector, and show what an equity research report typically consists of. Additionally, we list the top equity research companies in 2024.

What is equity research?

Equity research is an in-depth analysis of the company’s total equity (excluding debts). Equity research specialists analyze stocks, perform industry research, and do financial modeling to help portfolio managers make better investment decisions. 

In short, the main task of equity research is to provide investors with recommendations on whether to sell, buy, or hold a particular investment. Equity research findings are presented in a detailed equity research report.

Equity research can be conducted both on the sell- and buy-side of a potential deal:

• Sell-side equity research
  Sell-side research is typically performed by specialists who work for brokerage firms or investment banks. Their research is aimed at selling securities, providing investment recommendations, and facilitating deal-making.
• Buy-side equity research
  Buy-side equity research specialists typically work for institutional investors, such as hedge funds, pension funds, mutual funds, and insurance companies. They perform research to assist a portfolio manager in making investment decisions on behalf of their fund.

Responsibilities of equity research professionals

What are the typical tasks for equity research specialists? Their common responsibilities include:

• Industry analysis
  An investment opportunities review involves more than just financial analysis. It starts with learning the current market state, industry dynamics, regulatory changes, macroeconomic factors, and competitors’ performance. Knowing all that helps to better understand available investment opportunities.
• Management overview
  Equity research companies also review the management structure of the company and its quality. Unlike individual investors, equity research analysts can ask company management direct questions about the business and then form certain investment recommendations based on their replies.
• Financial analysis
  This includes analyzing financial records and documents such as a cash flow statement, balance sheet, and other financial reports. It also helps to compare historical financial results with current performance to understand whether a company’s current financial position is below, at, or above market expectations.
• Forecasting
  This involves providing potential investors with a forecast, i.e. the possible outcomes, of a possible investment. A forecast typically considers the industry size and growth, the company’s revenue, and market share.
• Financial modeling and valuation
  One of the most important steps of equity research is building financial models and performing a company valuation based on forecasts. This is to project future earnings and define the intrinsic value of the company. Some of the financial models equity research specialists use are discounted cash flow (DCF) and the three-statement model.
• Equity research report writing
  Equity research specialists present all their findings and recommendations in a comprehensive report. Such a report contains information about how the company’s stock is expected to perform on the stock market in a defined period and provides direct recommendations on investment (buy, hold, or sell).

Equity research vs. investment banking

On the surface, investment banking and equity research might seem quite similar, but these are two different processes. Moreover, equity research is often seen as the less glamorous sidekick of investment banking, with lower pay and less prestige attached to it. 

To put it simply, investment banking is about providing financial services to companies that are seeking to raise capital. While equity research is about analyzing publicly traded companies and making investment recommendations.

Equity research organizational structure

There are essentially three main roles an individual can take in the equity research division: analyst, associate, and director of research.

Let’s now take a look at what each of these roles entails.

Analyst

An equity research analyst is the most junior position in the equity research field. The average experience required is 2–4 years.

What does an equity research analyst do? Typical responsibilities include: 

• Supporting the firm’s associates
• Working on different client requests
• Conducting primary industry research
• Updating the financial model, verifying the data, and preparing valuation models
• Collecting and analyzing the company’s data to facilitate recommendations

Associate 

The next stage of a career in equity research is the position of equity research associate. The average experience needed to obtain this position is 8+ years.

Typical responsibilities of an equity research associate include:

• Performing fundamental stock analysis
• Covering about 8–15 stocks at once
• Developing quarterly results updates
• Communicating with clients and conducting regular calls
• Attending conference calls for important company updates
• Attending trade shows and meeting company management
• Maintaining accurate and timely research reports

Director of research

The director of equity research is the most senior position in the equity research field. The director (or Head of Research) is a key member of the equity research team: they provide the team with guidance, coaching, and leadership and ensure that all goals and objectives are met. The required experience to become a director of research is typically no less than 8 years.

The director of research is usually responsible for:

• Overseeing research reports and editing them when needed
• Monitoring the analysis process
• Providing timely and accurate support to the team
• Providing expert insights into the overall strategy and investment recommendations
• Hiring associates and analysts, monitoring their performance, and managing compensation
• Acting as a link between the team and the client

Career in equity research: requirements and opportunities

Now let’s take a look at the typical equity research career path. We briefly cover key requirements to enter the field, average working hours, compensation levels, possible career development, and exit opportunities.

Requirements

The field of equity research requires candidates to have strong hard and soft skills. The basic skill set includes:

• Strong educational background
  Most equity research positions require a bachelor’s degree in finance, accounting, economics, business administration, or a related field. Some employers may prefer candidates with advanced degrees, such as a Master of Business Administration (MBA) or a Chartered Financial Analyst (CFA).
• Financial literacy
  This implies a strong understanding of financial concepts, including financial statement analysis, valuation techniques, investment principles, and equity markets. Candidates should be proficient in financial modeling, quantitative analysis, and Excel spreadsheet skills.
• Analytical skills
  This encompasses the capacity to scrutinize financial statements, gauge shifts within industries, pinpoint pivotal performance catalysts, and appraise risk elements. Analytical skills play a crucial role in deciphering financial data, scrutinizing investment prospects, and formulating well-grounded investment suggestions.
• Research skills
  Since an equity research analyst’s work involves conducting in-depth research on companies, industries, and market trends, candidates should be skilled in gathering and synthesizing information from various sources, including financial databases, company filings, industry reports, and news sources.
• Communication skills
  Proficiency in both written and verbal communication is indispensable when it comes to conveying research discoveries, expressing investment advice, and fostering connections with both clients and colleagues. Equity research specialists should also be able to communicate complex financial concepts clearly and concisely.
• Industry knowledge
  Possessing a deep understanding and specialized expertise in particular sectors or markets can furnish a distinct competitive edge within equity research. Candidates may develop industry specialization through relevant work experience, coursework, certifications, or professional networking.

Working hours

Though still a job with a heavy workload, equity research specialists don’t work as many hours as investment bankers, for example. 

On average, equity research analysts and associates work about 12 hours a day in the busiest periods. However, there are phases of relative calm when equity research specialists work less intensively.

Compensation

The equity research analyst salary (as well as the associate’s and director’s salary) consists of the base and additional pay. 

These are the average annual salary ranges for main positions in the equity research division based on the Glassdoor findings (including base and additional pay):

• Analyst — $90,000-$142,000
• Associate — $119,000-$184,000
• Director — $243,000-$414,000

Career development

The possibilities for career development inside the equity research sector are rather limited for equity research specialists. 

There’s basically a single hierarchy: analyst, associate, and director of research. However, the level of seniority within each of these roles might differ from junior to senior.

Exit opportunities 

There are several exit opportunities for equity research specialists:

• Portfolio management
  Many equity research analysts transition into portfolio management roles, where they manage investment portfolios for institutional investors, hedge funds, asset management firms, or private wealth management clients.
• Investment banking
  Another option is to move into investment banking roles, particularly in sectors such as mergers and acquisitions (M&A), corporate finance, or capital markets.
• Private equity or venture capital
  Equity research specialists can also pursue opportunities in private equity or venture capital firms, where they focus on evaluating and investing in private companies. 
• Independent consulting
  One more exit opportunity is the transition to consulting roles in management consulting firms, where they provide strategic advisory services to clients across various industries. 

Equity research report structure

Now, let’s review the key components of a comprehensive equity research report:

• Executive summary
  This is basically a quick snapshot of the key findings of the report. It includes the analyst’s investment recommendation (buy, sell, or hold), target price, and brief reasoning behind the recommendation.
• Company overview
  This section provides an overview of the company’s business model, products or services, market position, history, management team, and any recent developments or events relevant to the analysis.
• Industry overview
  This section offers a detailed analysis of the industry in which the company operates, including market size, growth prospects, competitive landscape, regulatory environment, and key trends impacting the industry.
• Financial analysis
  In this part of the report, equity analysts provide a thorough analysis of the company’s financial performance, including revenue growth, profitability, margins, cash flow, balance sheet strength, and key financial ratios. 
• Financial projections and valuation
  Here, an equity analyst presents projections for the company’s future earnings and stock performance. Additionally, this section includes a valuation of the company’s stock, using various valuation methods. The analysts also provide a target price based on their valuation.
• Risks
  This section is about an assessment of the risks associated with investing in the stock or company, including industry-specific risks, company-specific risks, macroeconomic risks, regulatory risks, and any other factors that could impact the investment thesis.
• Investment thesis and recommendations
  In the final section of the report, equity research analysts provide a summary of their investment recommendations, including the rationale behind the recommendation, key drivers, upside/downside risks, and any warnings or considerations.

However, the final structure of the equity report might vary depending on the team developing it and the company it’s developed for. This is what the equity research report template from J.P. Morgan Cazenove looks like, for example.

Source: Corporate Finance Institute

And this is a part of the equity research report made by Merodis for FNG.

Source: Example.com

Best equity research firms in 2024

Let’s now list the top equity research firms that operate in 2024 and define key facts about them. 

Key takeaways

• Equity research refers to analyzing company stocks, performing industry research, and doing financial modeling to help portfolio managers make better investment decisions. 
• Equity research specialists can work both on the sell- and buy-side of the potential deal.
• Equity research professionals present all their findings in a comprehensive equity research report.
• The career path in the equity research sector usually involves starting at the analyst level and then growing to associate and director.