Definitions

Financial analyst

Financial analyst

A financial analyst (or securities analyst, research analyst, equity analyst, investment analyst) is a person who works with financial analysis.

Job

An analyst will write reports on the companies they are supposed to cover, trying to describe the businesses and their opinion of the company's investment potential, usually from a fundamental analysis standpoint. They also summarize that report with a rating, such as "buy", "sell", "market perform", "overweight", "hold", etc.

The analysts get their information by studying public records of the company and by participating in public conference calls where they can ask direct questions to the management. Previously, analysts were said to obtain lots of information (especially from clients of their investment bank), via exclusive meetings with upper management. Regulation FD (Fair Disclosure), is said to prevent most of this from happening at present.

Financial analysts, also called securities analysts and investment analysts, work for banks, insurance companies, mutual and pension funds, securities firms, and other businesses, helping these companies or their clients make investment decisions. Financial analysts employed in Commercial lending perform "balance sheet analysis," examining the audited financial statements and corollary data in order to assess lending risks. In a stock brokerage house or in an investment bank, they read company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates in order to determine a company's value and project future earnings. In any of these various institutions, the analyst often meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Usually, financial analysts study an entire industry, assessing current trends in business practices, products, and industry competition. They must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings.

Financial analysts use spreadsheet and statistical software packages to analyze financial data, spot trends, and develop forecasts. On the basis of their results, they write reports and make presentations, usually making recommendations to buy or sell a particular investment or security. Senior analysts may actually make the decision to buy or sell for the company or client if they are the ones responsible for managing the assets. Other analysts use the data to measure the financial risks associated with making a particular investment decision.

Financial analysts in investment banking departments of securities or banking firms often work in teams, analyzing the future prospects of companies that want to sell shares to the public for the first time. They also ensure that the forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete. They may make presentations to prospective investors about the merits of investing in the new company. Financial analysts also work in mergers and acquisitions departments, preparing analyses on the costs and benefits of a proposed merger or takeover. There are buy-side analysts and sell-side analysts.

Some financial analysts, called ratings analysts (who are often employees of ratings agencies), evaluate the ability of companies or governments that issue bonds to repay their debt. On the basis of their evaluation, a management team assigns a rating to a company's or government's bonds. Other financial analysts perform budget, cost, and credit analysis as part of their responsibilities.

Qualification

Although there are no formal qualification criteria, analysts usually have graduate level training in finance such as MSF or MBA degrees, or are qualified accountants. "Industry experience" is often a pre-requisite and so analysts often have undergraduate degrees in related fields. Also, many analysts originally enter this domain through their practice as consultants or accountants and so a very wide range of qualifications is common.

Increasingly, it is (additionally) required that analysts earn a professional certification such as the Chartered Financial Analyst (CFA) designation , or the Certified International Investment Analyst (CIIA) designation, particularly if they wish to advance beyond a certain level within a firm.

There are also often regulatory requirements relating to the profession. For example, in the United States, sell-side or Wall Street research analysts must register with FINRA, the Financial Industry Regulatory Authority. In addition to passing the General Securities Representative Exam, candidates must pass the Research Analyst Examination (series 86/series87) in order to publish research for the purpose of selling or promoting publicly traded securities.

Skill

Most analysts will require basic analytical skills, and very good numerical skills. Importantly, communication skills are necessary to explain complex concepts to management or clients.

Controversies about financing

The research department sometimes doesn't have the ability to bring in enough money to be a self-sustaining research company.

The research analysts department is therefore sometimes a unit of an investment, investment brokerage, or investment advisory firm.

Since 2002 there has been extra effort to overcome perceived conflicts of interest between the investment part of the firm and the public and client research part of the firm (see accounting scandals). For example, research firms are sometimes separated into two categories, "brokerage" and "independent"; the independent researchers are not part of an investment firm and don't have the same incentive to issue overly favorable views on companies.

But that might not be sufficient to avoid all conflicts of interest. The debate is still about the way sell-side analysts are paid. Usually brokerage fees pay for their research. But this creates a temptation for analysts to act as stock sellers and to lure investors into "overtrading".

Some consider that it would be sounder if investors had to pay financial research separately and directly to fully independent research firms.

Dan Reingold, a former securities analyst, gives examples of these and related controversies in his autobiographical book "Confessions of a Wall Street Analyst".

See also

Further reading

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