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Equity Research Skills

Updated on April 30, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Skills Required for Equity Research

Equity research skills are essential for professionals working in the financial industry, particularly in roles focused on analyzing stocks and making investment recommendations. These skills encompass a range of abilities, including financial analysis, industry research, and market forecasting. Proficiency in financial modeling, valuation techniques, and interpreting financial statements are crucial for conducting in-depth analyses of companies and assessing their investment potential.

Equity Research Skills

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Strong basic equity research skills enable professionals to stay abreast of market trends, industry developments, and macroeconomic factors that may impact stock performance. By honing these skills, equity research professionals can provide valuable insights to investors, helping them make multiple important decisions and optimize their investment portfolios for long-term success.

Equity Research Skills Explained

Equity research skills are fundamental for professionals engaged in analyzing stocks and providing investment recommendations within the financial industry. These skills involve a diverse range of abilities essential for conducting thorough analyses and making wise investment decisions.

Firstly, proficiency in financial analysis and accounting principles is an absolute non-negotiable. Equity research professionals must possess a deep understanding of financial statements, including income statements, balance sheets, and cash flow statements. Analyzing these statements allows analysts to assess the financial health of companies, identify trends, and evaluate key performance indicators crucial for investment decision-making.

Moreover, strong valuation skills are essential for determining the intrinsic value of stocks. Equity research analysts utilize various valuation methodologies, such as discounted cash flow (DCF) analysis, comparable company analysis (CCA), and precedent transactions analysis, to estimate the fair value of securities. These valuation techniques help analysts assess whether a stock is overvalued, undervalued, or fairly priced in the market.

Additionally, proficiency in financial modeling is pivotal for equity research professionals. Financial models allow analysts to forecast future financial performance, conduct scenario analysis, and assess the impact of different variables on investment outcomes. Building accurate financial models requires advanced Excel skills and a deep understanding of financial concepts and industry dynamics.

Furthermore, effective communication and writing skills are essential for conveying research findings and investment recommendations to clients and stakeholders. Equity research professionals must be able to articulate complex financial concepts in a clear, concise, and persuasive manner through research reports, presentations, and client interactions.

Overall, mastery of these private equity research skills enables professionals to conduct thorough analyses, provide valuable insights to investors, and make investment recommendations that drive positive outcomes in the financial markets.

Top Skills

Let us now understand the top 5 skills with respect to basic equity research skills through the discussion below.

#5 – Writing Skills

Writing Skills is at number #5. The equity research report is the most important communication from a securities firm to its clients. This report has a particular purpose; i.e., it is intended to help an investor decide on the allocation of resources.

  • First thing First – One crucial aspect is that the research report is nowhere close to novels from Dan Brown, wherein the best is saved for the last!. In a research report, the stock target and price recommendations come first.
  • KISS Principle – “Keep it Simple Silly” is the golden rule. It is essential to be to the point and precise.
  • Less is More – Another essential aspect is that you are not required to write a full Ph.D. thesis here; a single-page note or a couple of reports would be great. Readers hardly have 1-2 minutes to read your full report. They may not even scan till the 2nd page.

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#4 – Accounting Skills (More than Numbers!)

Number#4 is Accounting! Accounting here is not about Debits and Credits. It is much more than that.

  • Be proficient in Financial Statement Analysis – The keyword here is Financial Statement Analysis. You are expected to be proficient in vertical analysis, horizontal analysis, ratio analysis, cash conversion cycles, ROEs, ROCEs, etc.
  • Sourcing of Right Data – Another aspect where I see many challenges is sourcing the right data. For example, if you require an Annual Report of a company, would you visit the company’s website or the SEC website. Besides, which other documents will you refer to draw your conclusions? Typical key sources to look for information are Press Releases, Conference Calls SEC Filings, etc. Financial Statement Analysis done on the wrong set of numbers will lead to results that will mislead the analysis. Hence, as an analyst, the primary challenge is to fetch the correct data.
  • “Identify the Shenanigans” – Our main focus in Analyst specific Accounting is to identify and predict the accounting malpractices by companies. These are normally hidden away. You can see below the confessions in Satyam Fraud Case
Accounting Frauds

#3 – Valuations (Lies in the eyes of the beholder!)

Valuation Skills is at Number #3. Equity Valuation is estimating the potential market value of a financial asset or liability. Valuations are required in many contexts, including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and litigation. You should be aware of the following –

  • Intrinsic Valuation methods – Intrinsic Valuation Method (DCF) which means primarily determines the value by estimating the expected future earnings from owning the asset discounted to their present value.
  • Extrinsic Valuation Method – Relative value models determine the value based on the market prices of similar assets. It includes valuation ratios like PE Ratio, P/CF, P/BV, and many more.
  • The Key is to identify the right valuation methodology – There are more than 15 valuations approaches, including DCF, Enterprise Valuation Methods, and Equity Valuation Methods. The vital thing to know is why a particular valuation Methodology is used in a specific sector. For example, Banks are valued using Price/Book Value; however, other sectors may not use Price/Book Value as a key valuation metric.

#2 – Financial Modeling (Cliffhanger!)

At number #2 is Financial Modeling. Financial modeling means forecasting the future of the company or an asset using an Excel Model that is easy to understand and perform scenario analysis. In the context of our discussion here, Excel-based Financial Modeling includes professionally forecasting future financial statements like Income Statements, Balance Sheets & Cash Flows. Unfortunately, every other subject is taught during graduation and post-graduation except Financial Modeling and Excel.

  • Financial Modeling follows Modular Approach – The primary approach taken is the Modular one. The modular approach essentially means that we build core statements like Income statements Balance Sheet, and Cash Flows using different modules/schedules.
  • Provide Additional Schedules for clarity – The different schedules are the depreciation schedule, working capital schedule, intangibles schedule, shareholder’s equity schedule, other long term items schedule, debt schedule, etc. The different schedules are linked to the core statements upon their completion.
  • Free Financial Modeling Training – If you want to learn Financial Modeling from the ground up, you can refer to the Free Financial Modeling Course. Please note that Financial Modeling skills may not be very easy to acquire. It requires time and patience to master this skill set.

#1 – Excel Skills (Most Obvious is Most Dangerous!)

At number #1 is the Microsoft Excel Skills! I am obviously not joking. Equity Research Analyst spend around 10-12-14-16 hours each day working on excel doing financial modeling, valuations, and financial statement analysis. Important points to note in Excel are

  • Formatting is most important– An analyst needs to produce an error-free and neat output. There is a lot of money riding on the research reports published by the analysts and the last thing one needs is to lose a client due to loosely formatted tables and excel models.
  • Speed & Accuracy – Timely delivery of reports and models is required in the Equity Research Industry. MS Excel is the only place I can say where there are “Shortcuts to Success”! I have hardly seen research using a mouse, and most of them are masters in Excel.
  • Analysis – One should use Excel tools like Pivot, Filter, Sort, VLOOKUP in Excel, HLOOKUP Function, etc. to analyze complex data and client requests.
  • Scenario Building – It is important to create different scenarios for Modeling like Optimistic, Pessimistic, and Most expected. Also, your client may want to change a few assumptions to see how they affect the target price find terminal value, capm beta, etc. Hence, you need to be well aware of Data Tables, Goal Seek in Excel, etc. to provide these features to your clients.
  • Graphs & Charts – A picture speaks more than a thousand words! The majority of the research reports contain neat and informative investment banking graphs and charts and less written material. You should try and master this data representation technique.

Equity Research Vs Investment Banking

Let us understand the distinctions between basic equity research skills and investment banking through the comparative points below.

Equity Research

  • Equity research involves analyzing individual stocks and industries to assess their investment potential.
  • Equity researchers take deep look into financial statements, market trends, and industry dynamics to provide insights into the performance and prospects of specific companies.
  • They often utilize financial modeling and valuation techniques to estimate the fair value of stocks and make investment recommendations to clients.
  • Equity researchers interact closely with investors, asset managers, and other clients to communicate their research findings and provide actionable insights for investment decision-making.

Investment Banking

  • Investment banking includes a broad range of financial services, primarily focused on facilitating capital raising, mergers and acquisitions (M&A), and other corporate transactions.
  • Investment bankers advise corporations, governments, and institutional clients on strategic matters such as mergers, acquisitions, divestitures, and fundraising activities.
  • They play a crucial role in underwriting securities offerings, structuring deals, negotiating transactions, and providing financial advisory services.
  • Investment bankers interact closely with corporate executives, institutional investors, private equity firms, and other stakeholders to execute complex financial transactions and help clients achieve their strategic objectives.

This article has been a guide to Equity Research Skills. Here, we explain the top tangible skillsets that one should acquire, like report writing and accounting. Let me know what you think. Many thanks, and take care. Happy Learning!

Reader Interactions

Comments

  1. Farouq V. says

    Wow I normally read and your posts but I have really liked this one, great and informative. Actually am doing a course in banking and investment management – Uganda. I am so much interested in financial modeling and Excel program to help me get more skills for equity analyst and research.
    Thanks

  2. Nikhil Jaju says

    Hi Dhiraj,

    You are doing a tremendous job via this blog as it is quite informative.
    I am a Chartered Accountant and want to explore opportunities in the areas of Equity Research and Investment Banking. Further, I am pursuing CFA USA as well. So just wanted to know which certification apart from CFA Course I should pursue to land a job in these areas. I just came to know about Financial Modelling certification as well offered by many institutes. Does this includes Equity Research?

    • Dheeraj Vaidya says

      Hi Nikhil, CA + CFA is an awesome combination. Additionally, you can gain training in practical applications of Investment Banking and Equity Research. Financial modeling may or may not contain Equity Research as the scope of Financial Modeling varies with Institute.

  3. Hussein Abdulateef says

    hello, is the equity research training also included in the investment banking training course. thank you

    • Dheeraj Vaidya says

      Yes, it is included in the investment banking course.

  4. RAJAT KR says

    An excellent knowledge shared.
    It helps me to take a step ahed to be a ERA

  5. Gowtham says

    Nice article Dhiraj. I enjoyed reading it.

    • Dheeraj says

      Thanks Gowtham!

  6. shrikant says

    Hi Dhiraj,

    I am shrikant ex banker , served in credits in analysing balance sheets and preparing project reports for ccs/TL’s and side by side I develop passion about cap market, interested in pursuing financial modelling. Kindly communicate which is good course for me and its prospectus.
    regards,
    shrikant

  7. Neeraj says

    Very informative for aspirants in Financial and Business Performance Analysis …Cheers

  8. deepak says

    its a very useful information and i wanna to know more abut courses that i should pursue in financial carrier as sir am actually a student of 2nd year. am waiting eagerly for ur reply.

    • Dheeraj says

      Thanks Deepak for the note. You should look at developing 2 skills primarily, a) financial Modeling b) excel. You can take any course on this. Infact, on this website there is a free step by step tutorial on financial modeling as well.

      Hope this helps,
      Dheeraj

      • savi says

        Is this free financial modeling course enough to make me able to get the thorough knowledge of it.

        • Dheeraj says

          Hello Savi,

          this free financial modeling course is actually good enough to get knowledge on financial modeling. However, it is upto you to take your learnings ahead by applying the financial modeling methodologies learnt to other set of companies. More you practice, better you will become.

          All the very best,
          Dheeraj

  9. mohamad adityo nugroho says

    Thank you very much, Dheeraj

    Your article will guide me to be a good equity analyst :)

    Greetings from Jakarta

    • Dheeraj says

      thanks Mohamad!

      • Raj Kotecha says

        Hello Sir,

        I am a first year MBA Student and have cracked Equity Research analyst internship in an investment bank. I currently read Bloomberg Business, Business Today and Mint Newspaper everyday. Sir, I request you if you can guide me on other sources of data I should be reading apart from these 3 sources of data to get information that is beyond between the lines.

        Awaiting for your reply.
        Thank You.

        • Dheeraj says

          wow. Congratulations Raj. You are doing great! I think if you wish to do really well as an intern, learn Financial Modeling in Excel and valuations

          Hope this helps.
          Dheeraj

  10. Prateek Bali says

    It would be great if you could upload the financial model as well.

  11. mahendra says

    Thanks Dheeraj,
    each and every time i learn new things with the help of your articles…

    • Dheeraj says

      Thanks Mahendra, I am glad you find these articles helpful.

  12. Michael Samonas says

    Very usefull post as always. Dheeraj thanks for sharing so usefull subject with the rest of us. If you do not mind I tweet your posts and I share them with various groups at linkedin.

    BR

    Michael

    • Dheeraj says

      Many Thanks Michael! I really appreciate your help in sharing these posts in your group.

      Best,
      Dheeraj

  13. bruks says

    Thanks Rafael. I would like a specific example let’s say a simple “Balance Sheet”, “Income statement” Cash Flow” to build in Excel financial model with graphics.

  14. Vanshja Gairola says

    Nice article. Very informative.

    • Dheeraj says

      Many Thanks Vanshja!

  15. Hari says

    Great Article!!! Enjoyed project finance classes in educba.

    • Dheeraj says

      Thanks Hari!

  16. Rafael says

    Great post! Excelent read for students who are willing to pursue a career in equity research.

    • Dheeraj says

      Thanks Rafael :-)

  17. Nitesh says

    Thanks for the information.

    • Dheeraj says

      Thanks Nitesh!

  18. deepak says

    Content was very much useful. Thanks for the information.

    • Dheeraj says

      Thanks Deepak!

  19. sneha says

    Very good article. Please suggest some courses..

  20. Danish Cooper says

    This is some real good advice thanks alot. But is it possible to value a company without accounting skills and rather using mathematical techniques.

  21. Angela says

    Thanks Dheeraj. This was an eye opener. I always overlooked Excel, maybe it is high time for me to focus on MS Excel. Any startup training that you recommend for excel?

    • Dheeraj says

      Many thanks Angela.

    • Uuganaa says

      Hello Dear,
      I read your article and I’m really interested in FCA. Could you tell me how i study, what do i do need at first of all. I hope that you will help me.
      See you soon.