Equity research analysis is the prime focus of business analysis and financial analysis. Market researchers and financial analysts use equity analysis to inform the decision-making process of investors. Investors make decisions to buy, hold or sell shares of a company based on the findings of equity analysis. So, equity research analysis has crucial importance in business research. Business students specialising in finance must learn how to do equity analysis. This article will provide detailed guidelines about advanced techniques in equity research analysis.
What is equity research analysis?
Experts from a masters dissertation help firm have defined that equity research analysis involves financial analysis of a company. It includes ratio analysis and forecasting models to inform the decision-making process of portfolio managers. Investment bankers and individual investors employ equity analysis to comprehend the strengths and weaknesses of a company’s stocks. It helps them decide whether to buy, sell, or hold a company’s stocks. Equity researchers collect quantitative data on a company’s stocks and analyse them using statistical tools.
Researchers analyse a company’s stocks and their performance in the equity markets. Quantitative data is crucial for doing equity analysis. Banks frequently use equity analysis to provide evidence-based recommendations to their clients. To buy or sell a stock in the market. It involves employing complex financial and mathematical models to predict the stock’s current state and its future behaviour.
What is the importance of equity research analysis?
Equity research analysis fills the information gap between buyers and sellers of stocks. Individual investors do not have the time and resources to evaluate the performance of every stock. It is where equity research analysts step in and do the research to inform investment decisions. Market efficiency requires full disclosure of information. But many companies are not transparent about their stock value. As a result, investors make poor choices and buy an overvalued stock or sell a stock below its market value. Equity research analysts can save investors from making investment blunders and save them quite a lot of money. Equity research analysts employ rigorous analytical techniques and mathematical tools to evaluate the value of a stock. Researchers pick out the best-valued stocks and inform their clients’ decision-making process of investments. It helps investors generate profits and saves themselves from heavy losses.
What are the advanced techniques in equity research analysis?
Equity research analysis uses the following advanced techniques:
- Fundamental analysis
- Technical Analysis
Fundamental analysis is an advanced technique in equity research analysis. It intrinsically evaluates a stock’s value by analysing the economic and financial factors. Fundamental analysis technique moves from general to specific. The general analysis encompasses the evaluation of macroeconomic factors. Such as the economy’s overall health and its impact on the stock value. The particular analysis includes the evaluation of macroeconomic factors. The purpose of fundamental analysis is to comprehend the value of security, whether it is undervalued or overvalued. It determines a stock’s real market worth and informs investors’ decision-making process.
Market researchers who use fundamental analysis techniques specifically aim to identify stocks that are being traded in the market. They seek to determine whether these stocks’ current market value reflects their real worth. Fundamental analysts recommend those stocks to the investors. Whose real value is higher than the market value because it is a profitable venture. Market researchers use public data to determine the worth of stock. Public data refers to the overall state of the economy and the interest rates. Analysts also employ credit ratings to perform fundamental analysis. The micro analysis in fundamental analytical technique involves looking at the following financial factors of a company:
- Future Growth
- Equity returns
- Profit margins
Fundamental analytical technique in equity analysis has two major sub-components that are the following:
- Quantitative fundamental analysis
Quantitative fundamental analysis encompasses using numbers and mathematical data to perform equity research analysis. Researchers have to read the company’s financial statement and study the revenues, profits and assets.
- Qualitative fundamental analysis
Qualitative fundamental analysis is a subjective analysis but equally important. It helps the researchers evaluate a company’s management, quality of its operations, brand strength, and patents. Also, researchers can identify the market worth of a company’s stocks based on its quality and brand recognition. Qualitative analysis involves the analysis of a company’s business model and sources of its revenues.
Furthermore, it also consists of weighing how much competitive advantage a particular company has in the market. For example, the brand name and recognition are crucial indicators of the valuation of a company’s stocks. The ethical side is also important in fundamental qualitative analysis. For example, a company whose ethical practices are questionable and not transparent in its dealings are suspicious. Investors must be aware of a company’s ethical practices, its corporate laws and their implementation. Because otherwise, if the company is controversial, it is more likely that the value of its stocks will dwindle.
Equity research analysis involves another advanced analytical technique which is technical analysis. Technical analysis is the opposite of fundamental analysis. It is because technical analysis focuses on the price movements. Researchers evaluate a stock’s historical data and price movements to determine its current valuation and future prices.
Researchers use statistical data and highlight the trends and patterns in the price and volume of stocks. It look at the historical data and forecast the future worth of the stocks of a particular company. They use price charts to delineate the time frame. In which they want to observe the fluctuations in price and volume. Technical indicators help the researchers perform the equity research analysis efficiently. Technical indicators refer to the trend lines, price trends, moving averages and chart patterns. Price has an integral role to play in technical analysis. The insights generated after analysing the historical data of a stock inform the decision-making process of portfolio managers and investors.
Equity research analysis is a crucial component of market research. It involves applying complex quantitative and qualitative techniques to determine a stock’s fair value. Financial analysts and market researchers use financial models to evaluate and predict the prices of sticks. It is helpful for investment bankers, and individual investors to make wise investment decisions.
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