First thing which comes up every other guy’s mind after hearing equity research is: What is Equity Research? Let me explain you all about it. In the financial world, most investors and investment decisions are totally dependent upon the accurate information before investing in equities. So these decisions may include which company to be invested into, when to come out from particular stock, what has to be stop loss etc. In order to find out answers to these questions, there are special divisions formed under financial intermediaries and these divisions or departments are called as Equity Research divisions.
Equity Research primarily means analyzing company’s financials, performance ratio analysis, forecast the financial in excel (financial modeling) and explore scenarios with an objective of making BUY/SELL equity investment recommendation.
How does Equity Research Work?
Typically, an ER is divided into different coverage groups and each coverage group focuses on a specific industry sector;
- Performing Valuation of Listed Companies
This includes identifying a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business
- Researching the Economic and Industry parameters
The major chunk of work involves research on the general economy, the sector and the companies in question. They have to constantly keep up with the news and events in their sector. Once the data is gathered, detailed financial models are constructed to come up with company valuations.
- Performing a Fundamental Analysis
Fundamental analysis is a method used by investors before investing in equities to identify the intrinsic value of a stock. The current price of a stock may not reflect the actual value of the stock. The equity stocks may be overvalued or undervalued in the market. Fundamental analysts study the underlying health of the company in order to find the intrinsic value.
- Projection of Revenues or profits from the Company
Post this; the analysts will project the revenue for the Company, for at least the next five years. This projection will be based on the overall business plan. Various aspects are incorporated in the overall projection template – provide a simple and meaningful financial analysis.
- Compare the Fair Market Value with the market price
Post find the values, the analyst carries out the valuation and compares the fair market value with the market price, post which they provide a recommendation on the equity investment;
If the FAIR Market Value < Market Price, then Sell
If the FAIR Market Value > Market Price, then Buy
In a nutshell, a strong equity research will enable you to make the right decision regarding your equity investment.