What is a “Research Analyst”?
A research analyst is someone who researches companies and financial markets to generate investment ideas. Typically analysts are seeking investment opportunities by researching companies whose shares or bonds could be mispriced by the market.
In simple terms, the analyst will look at a company and then compare their own valuation of the shares or bonds with the market price. If the analyst believes that the company’s shares or bonds are being undervalued by the market, they recommend that a portfolio manager purchases them, as this will generate investment returns when the market ‘corrects’ the mispricing.
Research analysts can be divided into two categories, the sell-side, and the buy-side:
- Sell-side analysts work for investment banks or brokerage firms and produce independent research that they then ‘sell’ to asset management firms.
- Buy-side analysts work for asset managers and analyze the research that they have bought from the sell-side. They combine this with their own research to make recommendations to their portfolio managers.
Analysts usually focus their research on a particular asset class; for example, equity analysts focus on stocks whilst credit analysts focus on bonds. In addition, multi-asset analysts and strategy analysts specialize in making comparisons between asset classes.
Typically, analysts specialize in a particular industry or sector because companies operating in different industries can have very different business models and risks. For example, an analyst might focus on industrial businesses (e.g. aerospace and defense) or the consumer goods sector (e.g. food and beverages) and will learn about the industry as well as company-specific information.
How to Become a Research Analyst
The large investment banks and asset managers recruit a large number of graduates directly from university each year. They usually provide an initial training program for the graduates and will therefore recruit from a variety of degree disciplines – not just those with a finance or economics degree. Regardless, all recruits will require a strong academic record from the top universities or business schools.
Smaller brokerage firms and asset managers tend to recruit experienced analysts from the sell-side that have a proven track record; they will therefore expect these recruits to join as ‘desk-ready’ analysts.
There are also opportunities for those looking to move into a research role as an experienced hire from outside the research industry – these can be referred to as ‘lateral hires’. These lateral hires usually have expertise in a particular industry, to help fill a vacancy in that industry research team. Lateral hires would usually require:
- At least 3 years’ experience working in an operational or finance role in the industry, ideally with a degree in finance or economics
- At least 3 years’ experience working in a financial advisory capacity for the industry (e.g. accountancy or management consulting)
Experience as a research analyst can be an excellent way of opening doors into a wide variety of other careers, including in company management, private equity, or portfolio management.
The career map below summarizes potential career routes for a research analyst:
Key responsibilities for a junior equity research analyst include:
- Tracking company and industry news flow and highlighting significant news to other analysts on the team
- Conducting analysis and updating models when company results are announced
- Producing charts and written content for research reports
- Attending client meetings and answering client queries about companies or the team’s analysis
The role of an analyst is very broad and therefore requires a very balanced skillset – it isn’t usually sufficient just to be a ‘numbers’ person. However, the particular skills needed for an analyst include:
- An ability to cope with fast-paced pressured work: when there is major news flow on a company or a major market event, analysts need to react very quickly to this and maybe juggle queries from lots of different internal and external clients
- Strong financial and analytical skills: this requires not just being very comfortable with numbers and financial information, but also an ability to filter qualitative information to identify ‘what matters’
- Being detail-oriented to build trust: analysts will work hard to build and maintain client trust which will rely on the strength of their financial modeling and analysis – this trust is quickly lost if errors are spotted
- Strong communication skills are essential: analysts need to be able to communicate their ideas both verbally in written reports and will spend a lot of time talking to companies and clients
Check Your Understanding
Below is a multiple-choice question to test your understanding of this topic:
The incorrect answer is D: Investment recommendations are based on whether securities are being mispriced by the market, rather than whether the company is ‘good’ or ‘bad’.