Definition: Equity research refers to the analysis of a company’s fundamentals, financial statement analysis, financial modeling and scenario building for equity recommendations.
What Does Equity Research Mean?
What is the definition of equity research? Equity research divisions work both for the sell side and the buy side of a brokerage firm. ER analysts monitor the market and analyze the market trends and their effects on companies and stocks.
Despite its name, the ER deals with commodities and bonds, offering macroeconomic views and derivatives analysis when required by working jointly with the derivatives division of the brokerage firm. The main goal of ER is to provide insight and in-depth analysis of a sector, company or stock and use this information to assist investors in allocating their funds properly.
Let’s look at an example.
Example
Solon is an equity research analyst, who works at a boutique brokerage firm. He is specialized in the construction sector, and he follows the companies that operate in the construction industry. Over the course of years, Solon has developed high-level expertise in the sector, and he can produce accurate estimates of a firm’s potential growth. In addition, he has many contacts in the investor relation and analysis departments of the construction companies that he covers so that he cross-checks his estimates with them.
Solon is a buy-side analyst; hence, he works closely with hedge funds and other institutional investors, assisting them in crafting their investment strategies. On a typical day, Solon monitors the trends in the construction sector and analyzes financial data pertaining to construction companies. Furthermore, he uses a range of analytical tools to determine the true value of stocks and make the appropriate recommendations.
His main specialization is financial statement analysis and ratio analysis that allows him to efficiently perform financial forecasting and explore possible scenarios before making the final recommendation on a stock. Also, he produces approximately 5 to 8 reports per month that address macroeconomic issues or issues pertaining to the construction sector.
Summary Definition
Define Equity Research: ER means studying a company’s financial to see how strong it core business operations are.
