The role of equity research analyst is broken down into two roles: sell-side and buy-side equity research analyst. On a fundamental level, it appears that these two roles are similar as both parties spend their day researching companies and industries in order to make the best security selections. The difference is the type of company that employs them and the people to whom they make their recommendations.
The Role of Sell Side Equity Analyst
The sell-side equity research analyst will typically work for a brokerage company which manages individual client accounts. The brokerage company will provide clients with stock research and recommendations to ”buy”, “sell” or “hold” the stock. Every time the client makes a purchase, the company earns a brokerage commission.
- Strategy: The sell-side equity research analyst builds models that will project a company’s financial results (future earnings). They also conduct qualitative analysis by speaking with customers, suppliers, competitors, and other sources.
- Narrow focus: The sell-side research analyst typically follows a short list of companies, most often within one sector (for example, consumer goods), and it is his or her job is to become an expert on the key players in that industry.
- Publish reports: A major aspect of the sell-side equity research analyst role is to provide on-going research reports to the firm’s clients. These research reports include a set of financial estimates, price target, and a recommendation as to the stock’s expected performance.
The Role of Buy Side Equity Research Analyst
The buy-side equity research analyst typically works for an investment management company that manages pension funds, mutual funds, hedge funds or venture capital fund. They conduct research and make recommendations to the portfolio managers of the fund.
- Strategy: The buy-side equity analyst works toward finding the best performing securities for a fund. Both qualitative and quantitative analysis is performed to form recommendations. There is a huge amount of pressure to be correct because wrong choices can reduce the overall performance of the fund. Estimating what could go wrong with an investment idea is an important aspect of the analyst’s job.
- Broader focus: Buy-side equity analysts have broader coverage responsibility. They focus on two or three industries at a time and follow roughly 30-40 stocks.
- Client Reports: Buy-side equity research analysts conduct their own research which they provide directly to their clients in the form of regular monthly or quarterly performance reports. The buy-side equity analyst research is proprietary. It is not shared with those outside the company. It may be supplemented with public or purchased research from sell-side analysts.
Sell-side analysts are paid commission for delivering information and recommendations. Buy-side analysts are paid based on stock or fund performance. Both types of analyst spend their days reading news, tracking new information, interpreting financials, and deepening their knowledge of the market. At the end of the day, they both want to make the best recommendations for their investors.
- Research Optimus