Equity research is the practice of analyzing and evaluating public companies to make investing recommendations. It involves financial modeling, valuation analysis, and writing research reports. Equity research analysts work for investment banks, mutual funds, hedge funds, independent research firms, and other asset managers. It is a common career path for finance majors and MBAs looking to enter the investment industry.
So should you pursue a career in equity research? Here are some key considerations when weighing the pros and cons:
Pros of Equity Research
Here are some of the advantages of equity research as a career:
Intellectual Stimulation
Equity research involves analyzing companies, industries, and the overall economy. You’ll constantly be learning about different businesses, sectors, and macroeconomic trends. It’s an intellectually engaging field that will stimulate you on a daily basis.
Financial Modeling Skills
As an equity research analyst, you will build complex financial models valuing companies based on discounted cash flow, comps, precedent transactions, and other methodologies. These modeling skills are highly transferable to investment banking, private equity, corporate finance roles.
Work With Top Management
You’ll get to interact with senior management like CFOs and CEOs at the companies you cover through calls, meetings, and conferences. It provides exposure to top executives and how they operate their businesses.
Industry Knowledge
You’ll gain in-depth knowledge of the sectors and companies you follow. This includes understanding the competitive dynamics, market conditions, technology, and regulatory issues facing certain industries.
High Earning Potential
Equity research at top firms is a lucrative career. Junior analysts may earn $100k – $150k while senior analysts can earn total compensation of $500k or more at major banks.
Transferable Skills
The financial modeling, valuation, writing, and analytical skills you gain are transferable to investment banking, hedge funds, private equity, and corporate roles.
Cons of Equity Research
While equity research offers many advantages, there are also some potential drawbacks to consider:
Long Hours
Equity research can involve long hours spent financial modeling, writing reports, and taking calls with management. You may frequently be working evenings and weekends, especially around earnings season and to get reports out.
Less Client Interaction
Unlike investment banking, you won’t get as much client interaction in equity research. Your clients are mainly portfolio managers at your own firm. You won’t be directly selling deals and ideas to companies.
Stress Around Calls/Meetings
Earnings calls and meetings with management can induce stress because your questions could move the stock price. You need to be prepared with insightful questions.
Low Job Stability
Equity research teams expand and contract based on market conditions. In a downturn, analysts are more prone to layoffs than bankers.
Transition to Buy-Side Difficult
It’s competitive moving from the sell-side to buy-side firms as a portfolio manager. Some analysts get stuck on the sell-side their whole careers.
Less Pay Than Banking
At junior levels, investment banking compensation tends to be higher than equity research. The earning potential evens out more at higher levels.
Requirements to Be a Research Analyst
Here are the main qualifications needed to break into equity research:
Education
Most equity research analysts have bachelor’s degrees in finance, accounting, economics or a related field. Many also have master’s degrees such as an MBA. Academic success, including a high GPA and prestigious university, boosts chances.
Financial Modeling Skills
You need to be highly proficient in Excel and financial modeling. Complex valuation models are built and manipulated daily in equity research.
Accounting Knowledge
Solid accounting skills are a must. You will use knowledge of financial statements and valuation methodologies regularly. The CFA curriculum covers these topics.
Writing Skills
Equity research involves writing company reports, initiating coverage pieces, and earnings notes. Strong writing and presentation abilities are critical.
Industry/Sector Knowledge
Prior internships and knowledge of your desired coverage sector help. Bankers transitioning to research internally have an advantage here.
Networking/Connections
Gaining equity research experience via informational interviews and internships leverages your network. Applying cold with no contacts is difficult.
Day in the Life
Here is an overview of common tasks and activities equity research analysts undertake on a daily basis:
Financial Modeling
Build complex Excel models projecting the financial performance of companies. Update models with new quarterly results.
Writing Research
Draft and edit company reports, earnings notes, and initiating coverage pieces. Ensure accuracy and consistency.
Analyzing Companies
Deeply research and analyze business models, competitive landscape, market conditions, and performance drivers of companies under coverage.
Read Filings/Reports
Gather intel by reading 10-Ks, 10-Qs, Annual Reports, Management Discussions & Analysis, and other sources.
Communicate Recommendations
Update buy/hold/sell recommendations based on new data and events. Communicate opinions to sales and clients.
Calls and Meetings
Interview management teams, ask questions on earnings calls, and attend conferences/events to gain industry color and exposure.
Generate Investment Ideas
Use research to generate actionable investment ideas and stock picks. Quantify upside potential.
Career Progression
Here is a typical path for advancing within equity research:
Analyst
Entry-level position responsible for modeling, analysis, and contributing to reports.
Senior Analyst
Leads coverage of sectors and stocks. Writes reports. Manages junior analysts.
Principal/Vice President
Oversees research team. Leads coverage of top sectors. Engages closely with clients.
Executive Director/Managing Director
Heads entire research group. Determines high-level opinions and strategy.
Exit Opportunities
Equity research provides a solid foundation to transition into these career paths:
Portfolio Manager
Move from sell-side to buy-side by taking an investing role at a mutual fund, hedge fund, or other asset manager.
Investment Banking
Leverage your financial modeling and valuation skills in M&A, equity capital markets, or leveraged finance groups.
Private Equity
Join a private equity firm to be on the buying side and evaluate investments in companies.
Corporate Development
Work in corp dev doing M&A analysis and execution, strategic initiatives, and financial planning for a company.
Corporate Finance
Transition into a corporate FP&A role using your modeling and accounting skills to guide strategic decisions.
Equity Capital Markets
Leverage your equity knowledge helping companies execute IPOs, follow-ons, and convertible issuances.
Compensation
| Position | Base Salary | Total Compensation |
|---|---|---|
| Analyst | $100k – $120k | $150k – $250k |
| Senior Analyst | $120k – $150k | $250k – $400k |
| Principal | $150k – $175k | $400k – $750k |
| Executive Director | $175k – $225k | $750k – $1.5 million |
| Managing Director | $225k+ | $1 million – $3 million+ |
Equity research compensation is largely driven by bonus payouts tied to the performance and profitability of the firm. At junior levels, investment banking salaries tend to exceed equity research. But research can surpass banking at MD levels at some firms.
Top Equity Research Firms
Here are some of the leading equity research firms to work for:
Bulge Bracket Banks
Top tier global banks like Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Citi, UBS, and Credit Suisse.
Elite Boutiques
Independent research shops like Evercore ISI, Cowen, Bernstein, and MoffettNathanson.
Large Regionals
Oppenheimer, William Blair, Piper Sandler, Stifel, and Raymond James.
Securities Arms of Asset Managers
Fidelity (FMR), T. Rowe Price, Wellington Management, AllianceBernstein (AB), and Nuveen.
Conclusion
Equity research offers intellectual stimulation, FP&A skills, management access, career advancement, and high compensation. However, it does entail long hours, stress, and instability. Overall, it is a solid career choice for those passionate about capital markets and investments. Gaining equity research experience early via internships provides a major edge when applying for junior analyst roles out of undergrad or MBA programs.