Equity Research vs Credit Research – Know the difference!

Equity Research vs Credit Research

If you are keen on 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 key differences between the two career choices – Equity Research and Credit Research.

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#1 – Equity Research vs. Credit Research – Conceptual difference

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We would like to start by helping you understand the conceptual difference between the two.

Equity Research

What do you understand by equity researchWhat Do You Understand By Equity ResearchEquity Research refers to the study of a business, i.e., analyzing a company's financials, performing Ratio Analysis, Financial forecasting in Excel (Financial Modeling), & exploring scenarios to make insightful BUY/HOLD/SELL stock investment recommendations. Moreover, the Equity Research Analysts discuss their findings & details in the Equity Research Reports. read more? What is the concept of equity research? Let us just get some information about the same.

1. To start with, equity research is about finding the valuation of a company mind you, which is a listed company on the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more.
2. 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.
3. Once the economics is understood, you get into its financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or its balance sheet from its historical performance.
4. Now make the comparison of its past performance with its current performance (financial statement analysis)
5. Based on the management result on the historical performance and the industrial competition.
6. Using the equity calculation financial models, the fair price of the company is calculated.
7. The equity researcher plays a vital role in filling in the information gap between the buyers and the sellers.
8. 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.

Credit Research

However, credit research is more about bonds and interest rates. It is much more technical and complex in comparison with equity research. Credit is also categorized under the fixed income of the company.

1. Credit research is based on 5 fundamentals starting with the rivalry within the industry. You can also call it a 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 productsThe Substitute ProductsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility.read more, and finally, we have the threat of new product launches or new entries.
2. The analysis of the issuer is the next job of a credit researcher. When you study the issuer’s credit analysisCredit AnalysisCredit analysis is the process of drawing conclusions about an entity's creditworthiness based on available data (both quantitative and qualitative) and making recommendations about perceived needs and risks. Credit analysis also involves identifying, assessing, and mitigating risks associated with an entity's failure to meet financial commitments.read more, you include the study of the issuer’s financial statement. Here the financial flexibility and liquidity are crucial because bonds and debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more are said to be the most liquid products for investors. The critical factors of study and analysis include a rating of the company, the net debt of the company, earning of the company before interest, taxes, depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, 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, a five-year credit default swap or CDS. However, the considerations differ from the industry.
3. After considering basic fundamentals and doing the issuers analysis, it is also vital to do their security analysisSecurity AnalysisSecurity analysis is the process of interpreting the value of financial instruments such as stocks, bonds, debts, warrants, and other securities of a company to ensure that the investors are investing through publicly available information. The three related methods include fundamental, technical, and quantitative approaches.read more. 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 crucial 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.
4. 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 documentation. For example, a green light is given to issuers whose operations are considered to be least at risk for investors, whereas yellow light is given to issuers whose bonds are comparatively a little riskier than the green issuers whereas the red light issuer is the riskiest 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 

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We can give you an idea about what you require to become one of these professionals.

Equity research

1. To start with the educational qualification is essential. 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 CFAThe Chartered Financial Analyst (CFA®) Program offers a graduate-level curriculum and examination program designed to expand your working knowledge and practical skills related to investment decision-making. read more is an added qualification.
2. You require a very strong analytical skills understanding of relevant finance – valuations, DCF, Financial Modeling, Report Writing, mathematics, and accounting techniques.
3. You need to be very good with the verbal and written communication that will help you communicate ideas fluently and also effective because you need to be to interact clearly with your clients.
4. You need to be good with Microsoft Excel, PowerPoint presentations, and you must have experience in handling Bloomberg a plus.
5. Some basic criteria’s are good time management skills, clear priority understanding, along with being able to handle multiple projects at the same time.

Credit Research

Candidates interested in this profile should have a certain set of interests and also educational backgrounds. We have listed some of the prerequisites required in a candidate for the captioned profile below.

1. To start with, you need a bachelor’s degree in finance, economics, or other related fields. Degrees such as CA, ICWA, CMACMACMA is a certificate course offered by the IMA. Here are a few exam tips: 1) Don't panic if you don't know the answer 2) Don't get distracted during the multiple-choice section. 3) Keep track of the time and increase your speed.read more, MBA, and other postgraduate degrees in the field of finance is an added benefit to this course.
2. You should be interested in performing credit appraisals along with practicing the best practices of the course.
3. 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.
4. You must be interested in building and maintaining various credit risk models.
5. You should be able to and be interested in amplifying and monitoring credit systems.
6. One of your most important roles will be analyzing and studying the debt and loan portfolio performance of the issuer.
7. You need to streamline quantitative researchQuantitative ResearchQuantitative Research refers to the systematic investigation in which a person collects the data from the different respondents based on numerical figures. Data obtained is then analyzed to get the results using various mathematical, statistical, and computational tools.read more for the rate of interest or ROI.
8. You will have to enhance the Basel based rating system that will be only internal.
9. Of course, if you are a credit analyst, you will have recommendations related to lending and investment-based.
10. Finally, you will have to design credit strategies and credit portfolios.

#3 – Equity Research vs. Credit Research – Employment Outlook

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Equity research

As the market has been growing, so have the scope of employment; hence the market, in general, is expecting massive 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 informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more has become essential to solve problems. Some of the biggest employers for equity researchers are JP Morgan, Morgan Stanley, Credit Suisse, Citi, Barclays, HSBC, etc.

Credit Research

The requirement for the position of credit analystRequirement For The Position Of Credit AnalystThe top essential questions in a credit analyst interview are - what is credit analyst, explain the process of credit analysis, what are the 5Cs of credit analysis, what do you mean by interest coverage ratio, how to value a company, what do credit rating agencies do.read more has been significantly 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 more than 21,000 openings for the designation of credit analysts. This means new positions for the job role of credit analystsJob Role Of Credit AnalystsCredit analysts work in a variety of areas, including consumer credit, business credit, financial institutions, sovereign/municipal credit, and credit investment.read more 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

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Let us give you an idea as to what you should expect out of the career you choose.

Equity Research

As an equity researcher, you can earn

A 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 up to a basic compensation of $125000 to $250000, including a bonus anywhere close to 2 to 5 times your basic salary.

Credit Research

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

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Equity Research

Pros

• The start package and the 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

Cons

• 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.

Credit Research

Pros

• Great job growth and opportunities are expected in the coming 5 to 6 years
• Great salary package to start with and also massive companies to hire.
• Different job opportunities to choose from along with the option of industries

Cons

• Might have a 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 needs to be accurate.

#6 – Equity Research vs. Credit Research – Work-life balance

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Equity Research

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 the client request, discussion to the 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 LifestyleInvestment Banking LifestyleLong working hours, weekend work, a lot of hard work, and little sleep are all part of an investment banker's life. Life as an investment banker is described as hectic, but for those who want to live a life of dedication, competition, and risk while also performing well, investment banking is the appropriate choice.read more just for comparison.

Credit Research

However, a credit researcher’s job does not work in accordance with the market; hence he need not report working 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 require a lot of time. Even a credit researcher spends more than 40 hours a week at his workplace.

Both the jobs are equally demanding as they involve substantial financial risks for a little calculation mistake can cost them a lot of financial loss and also their careers.

What to Choose?

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Equity Research

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 by 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.

Credit Research

If you are ready to do a stressful job and play with facts and figures of companies make 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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