Equity research is an integral part of investment analysis that investors of all sizes use to make informed investment decisions. It helps understand the stock market in its latest form and estimate its upcoming trajectory. Without equity research, the lack of useful information will create inefficiency, resulting in the misrepresentation of the stocks. Equity research firms use their time and expertise analyzing stocks, industries, and peer groups to provide valuation and ROI estimates. Simply put, equity research fills the information gap, allowing individual investors to analyze each stock and make a buy, sell or hold decision. All in all, equity research makes the stock markets easier to explore.
The Scope of Equity Research
Equity research helps understand the following:
- Industrial Analysis: The researchers monitor the trends prevailing in the industry and use their competitor’s intelligence for analysis. Even a minor competitive, regulatory, or legal change may broadly impact the industry. So, equity research involves everything ranging from industry policies and governance to economics, technological advancements, and social trends.
- Financial Analysis: Researchers examine a stock’s past financial results carefully, clarifying whether it performed at, below, or above the market expectations. To make these estimates, they determine a stock’s vitality, growth potential and cash flow.
- Disclosures: Equity research firms identify potential issues adversely affecting a company’s future equity.
- Management: The research team examines a company’s management team and relays its competency to potential investors. A good team will add efficiency and enhance the company’s sustainability and vitality.
- Forecasting and Valuation: Based on a company’s industrial analysis, economy, and financial statements, researchers gauge how it will perform in the future. Besides that, they perform valuation that requires financial modeling fluency.
The Changing Face of Equity Research Analysis
Most brokerages conduct Wall Street research on the sell-side firms, while others are small boutique and independent research firms. Understanding the differences between the two is crucial to gauge the changing face of equity research analysis.
Companies that provide sizable investment deals to research firms are worthy of following in the market. Wall Street firms focus on big-cap stocks to remain profitable and generate lucrative investment deals, but they must face the challenging task of reducing costs. Most importantly, Wall Street research f
ocuses on large-cap, liquid stocks while ignoring most publicly traded stocks.
Many independent equity research firms provide stock research that Wall Street does not support. The research firms aim at bridging the information gap on Wall Street. Consequently, these research firms have become a significant source of stock-related information. However, individual investors avoid paying for research until they realize the importance of accurate data. On the contrary, institutional investors actively hire research teams to get an edge over their competitors.
Transformational Shifts in Equity Research
Advanced technology has replaced the proven practices in the industry, leading to innovation and the evolution of new information sources. These are the three primary themes shaping the future of equity research:
- Alternative Data: A majority of teams use or plan to use alternative data for their research. Apart from search trends, product pricing, web traffic, and expert insights, other sources may also gain adoption in the coming years. These include sentiment data, credit cards transaction data, IoT sensor data, etc.
- Artificial intelligence: Although the percentage of research teams using AI in their processes is pretty low, the number is expected to grow exponentially soon. It will help analyze the structure and unstructured content, read vast amounts of data, uncover relationships, and automate data analysis quickly.
- Changing relationships: The buyers will decrease their dependence on the sellers for research services. The growth of alternative data and increased use of AI will evolve the relationship between the buy and the sell sides.
How does Equity Research Increases Market Efficiency?
Equity research boosts market efficiency and fills the gap between aspiring investors and companies. It provides an objective and professional analysis according to a company’s investment potential. Some characteristics of a legitimate research firm include:
- Analytical services without promotion
- Not accepting equity that causes a conflict of interest
- Clear and full disclosure between the research firm and a company, allowing investors to evaluate the objectivity
Companies looking for legitimate research analyze their stocks and deliver information to their investors to boost market efficiency. The credibility of equity research firms depends on their efforts to inform investors and help them make informed decisions.
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