Risk Management Basics
- Fixed Income
- Credit Analysis | What Credit Analyst Look for? 5 C's | Ratios
- Equity Research vs Credit Research - Know the difference!
- Yield Curve Slope, Theory, Charts, Analysis (Complete Guide)
- Bond Pricing
- Coupon Bond
- Coupon Bond Formula
- Zero Coupon Bond
- Duration Formula
- Coupon Rate Formula
- Carrying Value of Bond
- Sinking Fund Formula
- Coupon Rate of a Bond
- Convertible Securities
- What are Treasury Bills?
- Repurchase Agreement
- Treasury Bills vs Bonds
- Coupon vs Yield
- Coupon Rate vs Interest Rate
- Credit Rating Process | A Complete Beginner's Guide
- Asset Backed Securities (RMBS, CMBS, CDOs)
- Loss Given Default - LGD | Examples, Formula, Calculation
- Top 7 Best Fixed Income Books
- ABS and MBS Index | Complete Beginner's Guide
- Top 10 Best Treasury Management Book
- Top 10 Best Credit Research Books
- Convexity of a Bond | Formula | Duration | Calculation
- Payment in Kind Bond | PIK Definition | Interest | Example
- Subordination Debt | Meaning | Example | Types | Risks
- Top 10 Best Books - Bonds Market, Bond Trading, Bond Investing
- Bonds vs Debentures
- Secured vs Unsecured Loan
- Bills of Exchange vs Promissory Note
- Bills of Exchange | Meaning | Examples | Top Features
- Promissory Notes
- Secured Loans
- Unsecured Loans
- Subordinated Debt
- Fallen Angel
- Bond Equivalent Yield Formula
- Junior Tranche
- Credit Analyst Interview Questions and Answers
- Debt Covenants | Bond Covenant Examples | Positive & Negative
- Credit Analyst Career
- Negative Covenants (Restrictive)
- Sinking Fund
- Bond Sinking Fund
- Negotiable Instruments
- Credit Spread
- Bond Pricing Formula
Equity Research vs Credit Research – If you are keen of making a career as a Financial Analyst, then two areas stand out within finance – Equity Research and Credit Research. Broadly speaking, Equity Research deals with stocks and stock markets, while Credit Research looks at Credit and Bond Markets.
In this in-depth article, we compare and contrast the the key differences between the two career choices – Equity Research and Credit Research.
#1 – Equity Research vs Credit Research – Conceptual difference
We would like to start with helping you understand the conceptual difference between the two.
What do you understand by equity research? What is the concept of equity research? Let us just get some information about the same.
- To start with equity research is about finding the valuation of a company mind you, which is a listed company on the stock exchange.
- Once you decide on a company you look at its economical aspects and stability and growth which can be GDP, its rate of growth, its competition, and its size in the market or the industry.
- Once the economics is understood you get into its financial statement or its balance sheet from its historical performance.
- Now do the comparison of its past performance with its current performance (financial statement analysis)
- Based on the management result on the historical performance and the industrial competition.
- Using the equity calculation financial models the fair price of the company is calculated.
- The equity researcher plays an important role in the filling in the information gap between the buyers and the sellers.
- The main job of an equity researcher is to spend a lot of time and energy on researching about these stocks.
Summarizing the equity research we can say that it researches the stocks or the shares price of a registered company.
However credit research is more about the bonds and the interest rates. It is much more technical and complex in comparison with equity research. Credit is also categorized under fixed income of the company.
- Credit research is based on 5 fundamentals starting with the rivalry within the industry you can also call it competition between the companies of the industry, the second fundamental is the bargaining power of the customer, and then comes bargaining power of the suppliers, then we have the threat of the substitute products and finally we have threat of new product launches or new entries.
- The analysis of the issuer is the next job of a credit researcher. When you study about the issuers credit analysis you include the study of the issuers financial statement. Here the financial flexibility and liquidity is extremely important because bonds and debentures are said to be the most liquid products for investors. The key factors of study and analysis include rating of the company, the net debt of the company, earning of the company before interest, taxes, depreciation and amortization for the last 12 months or one year you can also call it EBITDA, EBITDA interest coverage, net debt on EBITDA, Funds from the operations upon net debt, debt upon capital and finally five year credit default swap or CDS. However the considerations differ with industry.
- After considering basic fundamentals and doing the issuers analysis it is also very important to do their security analysis. The next consideration is analyzing the views of specific issues for example bonds or loans, examining the capital structure and the process of capital structuring is important for it will help you understand the position of the company in the resilience stage, then to a shock stage and finally the recovery stage. in the current market the level of bank debts has increased in comparison to unsecured debts therefore during the time of deep recession the credit analyst expect lesser recovery rate in the downturn. Hence you need to understand the problems arising the bonds documentations.
- The reason behind any credit research is to add value in various ways to different sectors and different security selections in order to avoid black holes and defaults and high value generation. The researchers use the traffic light system in order to recommend investing in the bond documentations. For example green light is given to issuers who’s operations are considered to be least at risk for investors, where as yellow light is given to issuers who’s bonds are comparatively a little more risky than the green issuers where as the red light issuer is the most risky issuer in the market for investing in.
To summarize credit research we can say its analysis revolves around the documentations of the bonds of the issuer.
#2 – Equity Research vs Credit Research – Career Pre-requisites
We can give you an idea about what you require to become one of these professionals.
- To start with the educational qualification is important. To become an equity researcher you first need to have a bachelor’s degree either in finance or economics or other related fields. MBA and CFA is an added qualification.
- You require very strong analytical skills understanding of relevant finance – valuations, DCF, Financial Modeling, Report Writing, mathematics and accounting techniques.
- You need to be very good with your verbal and written communication that will help you communicate ideas fluently and also effectively because you need to be to interact clearly with your clients.
- You need to be good with Microsoft excel, power point presentations and you must have an experience in handling Bloomberg a plus.
- Some basic criteria’s are good time management skills, clear priority understanding along with being able to handle multiple projects at the same time.
Candidates interested in this profile should have certain set of interest and also educational background. We have listed some of the perquisite required in a candidate for the captioned profile below.
- To start with you need a bachelor’s degree in finance, economics or other related fields. Degrees such as CA, ICWA, CMA, MBA and other post graduate degrees in the field of finance is an added benefit to this course.
- You should be interested in performing credit appraisals along with practicing the best practices of the course.
- Interest in generating better trade ideas along with identifying the problem loans in the financial statements of the issuers should interest you as a credit researcher.
- You must be interested in building and maintaining various credit risk models.
- You should be able to and be interested in amplifying and monitoring credit systems.
- One of your most important roles will be analyzing and studying the debt and loan portfolio performance of the issuer.
- You need to streamline quantitative research for the rate of interest or the ROI.
- You will have to enhance Basel based rating system that will be only internal.
- Off course if you are a credit analyst you will have to recommendations related to lending and investments based.
- Finally you will have to design credit strategies and credit portfolio.
#3 – Equity Research vs Credit Research – Employment Outlook
As the market has been growing so have the scope of employments; hence the market in general is expecting a huge growth in the demand for equity researchers. This is because to mitigate risk the use of quantitative models of strategies is becoming very important. Mostly the companies have been focusing on the quantitative data over qualitative data as financial information has become important to solve problems. Some of the biggest employers for equity researchers are JP Morgan, Morgan Stanley, Credit Suisse, Citi, Barclays, HSBC, etc.
The requirement for the position of credit analyst has been very less and has been decreasing since the year 2004. In fact the dip has been more than 6% globally with an average dip of 1.1% annually. However with the improving market the demand for the captioned profile is expected to increase. The market is expecting about more than 21,000 openings for the designation of credit analysts. Which means new positions for the job role of credit analysts will increase by 4.4% annually by the year 2018. Companies hiring credit analysts are Deutsche Bank, Barclays Standard Chartered Bank, HSBC, CITI, etc.
#4 – Equity Research vs Credit Research – Salary
Let us give you an idea as to what should you expect out of the career you choose.
As an equity researcher you can earn
Junior analyst that is the start of your career you will start not less than between $45000 to $50000 annually as your base salary. Compensations and allowances change with the companies.
Associate: as you grow in your experience your wages increase with your experience. You may draw anywhere close to $65000 to $90000 annually along with about 50 to 100% bonus.
As a senior analyst your salary pr your annual package may increase upto a basic compensation of $125000 to $250000 including a bonus anywhere close to 2 to 5 times of your basic salary.
With this course and only a bachelor’s degree you can start your career with a handsome average package of $67000 annually.
#5 – Career Pros & Cons
- Start package and future package seems very good and healthy.
- Various career options are open for an equity researcher for he can either work as an employee or as a professional.
- Has in an out idea of the market
- Spends his life that is all his time and energy in stock research.
- His job includes a lot of responsibility as a little calculation mismatch can cost the companies and his investors a lot, resulting in his career loss.
- Great job growth and and opportunities are expected in the coming 5 to 6 years
- Great salary package to start with and also very big companies to hire.
- Different jobs opportunities to choose from along with option of industries.
- Might have very hectic job profile with spending more than 40 hrs a week at work.
- Again a very risky job or a job with very high responsibility for calculations need to be accurate.
#6 – Equity Research vs Credit Research – Work-life balance
Very hectic job!!! An equity researcher starts his day at 7.00 am that is before the market starts at 9.00 starting with morning meetings right up to following the market, from client request, discussion to closure of the market and even after the market closes working on the research pieces for publications. An equity researcher finishes his job by 7.30 to 8.00 in the evening which is spending more than 12 hours at work. The job here is quite tough and demanding.
Also, checkout Investment Banking Lifestyle just for comparison
However a credit researcher’s job does not work in accordance with the market, hence he need not report to work that early in the morning. Yet his job is not that easy as he needs to research the data and financial status of companies or issuers of bonds. His research work does need a lot of time. Even a credit researcher spends more than 40 hours a week at his work place.
Both the jobs are equally demanding as they involve huge financial risks for a little calculation mistake can cost them a lot of financial loss and also their careers.
What to Choose?
The job of an analyst sounds like a dream job for candidates passionate about money and the market. However it isn’t an easy job to do. If you are willing to spend most of your life working surrounded with a hell number of challenges you must consider this as your career. No doubt it provides you amazing growth both career wise and money wise it also provides you excellent exit opportunities.
If you are ready to do a stressful job and play with facts and figures of companies take decisions, predict interest rates give recommendations then this is the job for you. Remember that this job is not an easy job or a job that can be taken casually. It is a demanding job that needs a lot of both hard and smart work.
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