Financial analyst
Encyclopedia
A financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis
for external or internal clients as a core part of the job.
principles but technical chart analysis and tactical evaluation of the market environment are also routine. Often at the end of the assessment of analyzed securities, an analyst would provide a rating recommending an investment action, e.g. to buy, sell, or hold the security.
The analysts obtain information by studying public records and filings by the company, as well as by participating in public conference calls where they can ask direct questions to the management. Additional information can be also received in small group or one-on-one meetings with senior members of management teams. However in many markets such information gathering became difficult and potentially illegal due to legislative changes brought upon by corporate scandals in the early 2000s. One example is Regulation FD (Fair Disclosure) in the United States. Many other developed countries also adopted similar rules.
Financial analysts are often employed by mutual and pension funds, hedge funds, securities firms, banks, investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions. Financial analysts employed in commercial lending perform "balance sheet analysis
," examining the audited financial statements
and corollary data in order to assess lending risks. In a stock brokerage house or in an investment bank, they read company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates in order to determine a company's value and project future earnings. In any of these various institutions, the analyst often meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Usually, financial analysts study an entire industry, assessing current trends in business practices, products, and industry competition. They must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings.
Financial analysts use spreadsheet and statistical software packages to analyze financial data, spot trends, and develop forecasts; see Financial modeling. On the basis of their results, they write reports and make presentations, usually making recommendations to buy or sell a particular investment or security. Senior analysts may actually make the decision to buy or sell for the company or client if they are the ones responsible for managing the assets. Other analysts use the data to measure the financial risks associated with making a particular investment decision.
Financial analysts in investment banking
departments of securities or banking firms often work in teams, analyzing the future prospects of companies that want to sell shares to the public for the first time. They also ensure that the forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete. They may make presentations to prospective investors about the merits of investing in the new company. Financial analysts also work in mergers and acquisitions
departments, preparing analyses on the costs and benefits of a proposed merger or takeover. There are buy-side analyst
s and sell-side analyst
s.
Some financial analysts collect industry data (mainly balance sheet, income statement and capital adequacy in banking sector), merger and acquisition history and financial news for their clients. They normally standardize the different companies data to look uniform and facilitate their clients to do peer analysis. Their main objective is to enable their clients to make better decisions about the investment across different regions. They also provide the abundance of financial ratios calculated from the data that they gather from the financial statements that help clients to read the bottom line of the company. Many people mix up this with the data entry job but actually its far away from just data entry.
Some financial analysts, called ratings analysts (who are often employees of ratings agencies), evaluate the ability of companies or governments that issue bonds to repay their debt. On the basis of their evaluation, a management team assigns a rating to a company's or government's bonds. Other financial analysts perform budget, cost, and credit analysis as part of their responsibilities.
(CFA) designation. There are also many regulatory requirements. For example, in the United States, sell-side or Wall Street research analysts must register with the Financial Industry Regulatory Authority
(FINRA). In addition to passing the General Securities Representative Exam
, candidates must pass the Research Analyst Examination (series 86/series87) in order to publish research for the purpose of selling or promoting publicly traded securities.
The research department sometimes doesn't have the ability to bring in enough money to be a self-sustaining research company. The research analysts department is therefore sometimes a unit of an investment
, investment brokerage, or investment advisory
firm.
Since 2002 there has been extra effort to overcome perceived conflicts of interest
between the investment part of the firm and the public and client research part of the firm (see accounting scandals
). For example, research firms are sometimes separated into two categories, brokerage and independent. Independent researchers are not part of an investment firm and so don't have the same incentive to issue overly favorable views on companies. But this might not be sufficient to avoid all conflicts of interest.
Debate still exists about the way sell-side analysts are paid. Usually brokerage fees pay for their research. But this creates a temptation for analysts to act as stock sellers and to lure investors into "overtrading."
Some consider that it would be sounder if investors had to pay financial research separately and directly to fully independent research firms.
Financial analysis
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project....
for external or internal clients as a core part of the job.
Job
Writing reports or notes expressing opinions is always a part of "sell-side" (brokerage) analyst job and is often not required for "buy-side" (investment firms) analysts. Traditionally, analysts use fundamental analysisFundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...
principles but technical chart analysis and tactical evaluation of the market environment are also routine. Often at the end of the assessment of analyzed securities, an analyst would provide a rating recommending an investment action, e.g. to buy, sell, or hold the security.
The analysts obtain information by studying public records and filings by the company, as well as by participating in public conference calls where they can ask direct questions to the management. Additional information can be also received in small group or one-on-one meetings with senior members of management teams. However in many markets such information gathering became difficult and potentially illegal due to legislative changes brought upon by corporate scandals in the early 2000s. One example is Regulation FD (Fair Disclosure) in the United States. Many other developed countries also adopted similar rules.
Financial analysts are often employed by mutual and pension funds, hedge funds, securities firms, banks, investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions. Financial analysts employed in commercial lending perform "balance sheet analysis
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
," examining the audited financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
and corollary data in order to assess lending risks. In a stock brokerage house or in an investment bank, they read company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates in order to determine a company's value and project future earnings. In any of these various institutions, the analyst often meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Usually, financial analysts study an entire industry, assessing current trends in business practices, products, and industry competition. They must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings.
Financial analysts use spreadsheet and statistical software packages to analyze financial data, spot trends, and develop forecasts; see Financial modeling. On the basis of their results, they write reports and make presentations, usually making recommendations to buy or sell a particular investment or security. Senior analysts may actually make the decision to buy or sell for the company or client if they are the ones responsible for managing the assets. Other analysts use the data to measure the financial risks associated with making a particular investment decision.
Financial analysts in investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
departments of securities or banking firms often work in teams, analyzing the future prospects of companies that want to sell shares to the public for the first time. They also ensure that the forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete. They may make presentations to prospective investors about the merits of investing in the new company. Financial analysts also work in mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
departments, preparing analyses on the costs and benefits of a proposed merger or takeover. There are buy-side analyst
Buy-side analyst
Buy-side analysts work for buy side money management firms such as mutual funds, pension funds, trusts, and hedge funds. They are incentivised to identify investment opportunities that will improve the net worth of the portfolio they work for....
s and sell-side analyst
Sell-side analyst
A sell-side analyst works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." They are incentivised by offering their recommendations...
s.
Some financial analysts collect industry data (mainly balance sheet, income statement and capital adequacy in banking sector), merger and acquisition history and financial news for their clients. They normally standardize the different companies data to look uniform and facilitate their clients to do peer analysis. Their main objective is to enable their clients to make better decisions about the investment across different regions. They also provide the abundance of financial ratios calculated from the data that they gather from the financial statements that help clients to read the bottom line of the company. Many people mix up this with the data entry job but actually its far away from just data entry.
Some financial analysts, called ratings analysts (who are often employees of ratings agencies), evaluate the ability of companies or governments that issue bonds to repay their debt. On the basis of their evaluation, a management team assigns a rating to a company's or government's bonds. Other financial analysts perform budget, cost, and credit analysis as part of their responsibilities.
Qualification
At an increasingly large number of firms it is preferred that analysts earn the Chartered Financial AnalystChartered Financial Analyst
The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) designation. There are also many regulatory requirements. For example, in the United States, sell-side or Wall Street research analysts must register with the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA). In addition to passing the General Securities Representative Exam
General Securities Representative Exam
The General Securities Representative Exam, commonly referred to as the Series 7 Exam, is a required exam to become a Registered Representative of a broker-dealer in the United States....
, candidates must pass the Research Analyst Examination (series 86/series87) in order to publish research for the purpose of selling or promoting publicly traded securities.
Controversies about financing
Analyst recommendations on stocks owned by firms employing them may be seen as potentially biased. This may be less of an issue with analysts employed by firms that do not own the recommended stocks.The research department sometimes doesn't have the ability to bring in enough money to be a self-sustaining research company. The research analysts department is therefore sometimes a unit of an investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, investment brokerage, or investment advisory
Investment advisory
An Investment advisory, in financial/investment organizations, is the unit linking the investment professionals in the central asset management unit to the relationship managers and/or to important clients of the asset management organization.Investment Advisors explain the investment ideas of the...
firm.
Since 2002 there has been extra effort to overcome perceived conflicts of interest
Conflicts of Interest
"Conflicts of Interest" is an episode from the fourth season of the science fiction television series Babylon 5.-Arc significance:* Garibaldi begins to work for William Edgars. In the process Garibaldi is reintroduced to his ex-girlfriend, Lise, who is currently married to Edgars.* The "Voice of...
between the investment part of the firm and the public and client research part of the firm (see accounting scandals
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
). For example, research firms are sometimes separated into two categories, brokerage and independent. Independent researchers are not part of an investment firm and so don't have the same incentive to issue overly favorable views on companies. But this might not be sufficient to avoid all conflicts of interest.
Debate still exists about the way sell-side analysts are paid. Usually brokerage fees pay for their research. But this creates a temptation for analysts to act as stock sellers and to lure investors into "overtrading."
Some consider that it would be sounder if investors had to pay financial research separately and directly to fully independent research firms.
Further reading
- Lehman bust highlights analyst "group-think disease", Elinor Comlay, reuters.com, Sep 10, 2009
- The Changing Role Of Equity Research, investopedia.com
- What To Know About Financial Analysts, investopedia.com
- Becoming A Financial Analyst, investopedia.com