Equity research is the process of analysing a business and the environment in which it operates to arrive at a buy, sell or hold investment decision.
To know more about what is equity research first, we should know what equity basically means.
Equity is the value of the assets minus the outstanding liabilities or debt. In other words, it is the residual ownership in a particular asset or firm. In business context, it is the portion of the company owned by shareholders. Shareholders invest in the company by buying the stock of the company. The value of the share goes up as the company grows and increases in value, letting the shareholder earn a return on their investments. These returns are either capital gains or dividends.
There are various types of equity securities like:
Common Stock: A common stock pays variable dividend to investors based on the performance of the company. It has the last preference in case of liquidity and dividend payment
Preferred Stock: A preferred stock pays a fixed dividend irrespective of the company’s performance. It is given second preference in case of liquidity and dividend payment. Preferred stock is further classified as cumulative, non-cumulative, participating, non-participating and convertible
Warrants: Warrants are similar to options. They give the holder the right to buy firm’s equity shares at a fixed price prior to the warrant’s expiration.
Now will see what is equity research Means.
Equity research is the process of analysing a business and the environment in which it operates to arrive at a buy, sell or hold investment decision.
It is a critical process in financial management which helps investors to make well informed decisions about where to invest their money.
Equity research usually involves a team of analysts who specialise in a particular sector or industry such as Automotive, Healthcare, IT, Cloud, Retail, etc. These analysts collect data about the companies they cover which usually include financial statements, business cycle, industry trend and peer comparison. Based on the analysis of the collected information, the analysts prepare reports with a suitable recommendation.
Equity research is classified into two types:
Buy side equity research: In buy side equity research, the financial research is conducted by analysts working for institutional investors such as hedge funds, mutual funds and pension funds.
Buy-side equity research analysts concentrate on examining businesses and sectors in order to find investment possibilities that would offer their customers good returns. To ascertain the intrinsic worth of a business’s stock and weigh the possible risks and rewards of investing in that company, this often entails doing in-depth financial analysis, modelling, and forecasting.
In order to obtain a deeper understanding of the company and its competitive environment, buy-side equity research analysts also frequently participate in comprehensive due diligence, which may include meeting with company management, going to industry conferences, and communicating with industry experts. On behalf of their customers, they make investment decisions using the knowledge gained from this study.
Sell side equity research: Financial analysts who work for investment banks, brokerage houses, and other financial institutions carry out sell-side equity analysis. Sell-side equity research is carried out for the advantage of the firm’s clients, who are often individual investors, as opposed to buy-side equity research, which serves institutional investors.
Sell-side stock research analysts are motivated to bring in trading commissions for their companies, and their research papers are frequently used to highlight the company’s investment banking offerings. Due to the possibility that the analysts’ recommendations may be influenced by their desire to bring in business for their companies, there is occasionally the notion that there may be a conflict of interest.
The prime aim of equity research is to provide detailed insights of a company’s operational and financial performance along with an outlook. Equity research is important for the companies as it gives them investors perception and helps identify areas that need improvement. Finally, it helps to allocate capital to companies that will generate better returns.
Equity research involves a number of steps which are:
Company selection: The initial step in equity research is the selection of the company. The analysts will usually have a set of parameters to filter out the companies to be covered. Some of the common parameters are the volume, market cap, ratios, etc
Financial Analysis: After the selection of the company, analysts will start analysing the financial statements of the company. This step will help in arriving at a clear picture of the company’s profitability, liquidity and solvency
Industry Analysis: Industry analysis provides various insights like company’s competitive position, broad market trends and the conditions that may affect the performance of the company. It helps analysts to forecast the demand for the company’s products and how well they are placed in the market
Valuation: Based on the financial and industrial analysis, research analysts will use various valuation methods to estimate the intrinsic value of the company. Some of the methods used by analysts are discounted cash flow (DCF), relative valuation and asset-based valuation
Report writing: Analysts compile a report that summarizes the findings and provide a buy, sell or hold rating based on the analysis and valuation done. These reports will be distributed to clients, companies, published on financial websites.
Conclusion
Equity research improves the efficiency of the markets by increasing the market participants as they can take informed investment decisions. It also helps increase the allocational efficiency in the market. It helps in valuing any business precisely.
About us
We at CrispIdea serve broad range of clients – private equity houses, broking firms, hedge funds, advisory firms and corporates. CrispIdea focuses on companies and industries headquartered in some of the world’s most innovative clusters such as Silicon Valley, Boston, Tel-Aviv, Bangalore and Shenzhen. With in-depth analysis of companies, industries and markets; CrispIdea leads in the field of specialized research in high growth sectors. It is also one of the financial industry’s active participants in equity and industry research.
CrispIdea has covered sub-segments such as Big Data Analytics, Software as a Service, Artificial Intelligence, Virtual Reality, Cloud, Ecommerce, Semiconductors, Biotechnology, Medical Devices, etc. CrispIdea was founded as an independent research house in 2008 and since then it has created a strong reputation in the sectors that it covers with a client base of nearly 2500+ private equity houses, venture capital funds, investment banking companies and corporate clients.
– Harvind Viswanath (Crispidea Analyst)
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