“Yes, this stock has hit its peak, this is the right time to sell”. Where does this recommendation come from? How do Mutual Funds or Wealth management companies decide, which stocks to invest in? The answer lies in the extremely interesting field of Equity Research.
Broadly, there are two methods of analyzing a stock’s performance:
The ‘Fundamental Analysis’ approach, looks at the fundamental factors driving stock value: the economy, industry and the company’s financials. Using these, it then arrives at a fair value. The basic idea here is, the price of a stock should, finally, reflect its actual value.
It often doesn’t. Prices are also driven by herd mentality, fear, greed and mismatches between the demand and supply of the stock!
So, if a stock is trading at below its fair value, then you’d buy it – its price should go up, to the fair value; and vice versa.
Technical Analysis, on the other hand, is based on the principle that past investor behaviour will repeat in the future. That is, price movements in the past, will repeat in the future. It involves pure analysis of the past patterns of stock price movements.
In real life, most professionals, use a combination of both.
As a fresher, how do you get the knowledge, to enter this field? First, let us understand the roles available to you. We can then see, how to get there.
Broadly, entry level roles are available in –
(a) the businesses which actually do the trading Brokerage firms. They need the research, so that they can advise their clients. They use these research reports, to showcase their expertise as well. Examples are IIFL, Angel Broking, Anand Rathi, etc.
(b) Global investment houses such as Goldman Sachs, Nomura have their captive research units (KPOs) in India, where Analysts will research not just Indian stocks, but stocks in other markets too. Traders will make decisions, or recommend investments to clients, basis this analysis.
There are third party KPOs as well, who handle the research for a range of clients – again, these are usually, global financial institutions. Examples of third party KPOs are Copal Amba, Crisil, Evalueserv, etc.
A brokerage firm typically prefers people with experience; at the least, an MBA in Finance. Freshers have more options in a KPO: the client there would lay out a template, and you would have very specific tasks.
In either case, your designation will usually be ‘Research Analyst’ or ‘Research Associate’.
An Analyst starts by doing some basic analysis such as calculating ratios using standard templates built in-house. She soon starts specializing in a particular industry such as IT, Healthcare, Auto, etc. She needs to acquire in-depth knowledge of a particular sector, in order to grow as an Analyst. This is because, a lot of factors external to the company, affect that particular industry. For example, US visa and outsourcing rules, will impact the Indian IT industry.
Within the Research team, it’s a fairly flat structure. You’ll grow quickly to doing the complete analysis of a company. However, the final report and recommendation (Buy?/Hold?/Sell?) is done by the head of Analysis for that sector.
So, how do you get there?
This is a competitive field! First, make a list of ten companies in each – Brokerages, Captive and Third Party KPOs, you can apply to. Second, find out the head of research on LinkedIn, for each company – you can also derive the email ID, by using the ‘email@example.com’ format.
Write to each of them, with a customized cover note, and your CV.
But for the CV to catch their attention, you have to make sure, you have a great CV AND the right knowledge, to crack the interview. You must showcase your focus in this area – either via an internship, a project and/or a good short term course, with an industry endorsed certification. An extremely relevant one is the FLIP-NCFM certification on Equity Research issued by NSE. Once you’ve done this, you can also add on a FLIP Certification in Technical Analysis – both of them together, with give you a Research Analyst certification.
Make sure, you mention your certification, in your cover note.
“I am extremely interested in Research and have completed a FLIP-NSE Certification in Equity Research; I also follow the markets closely and have written some sample reports as well, which I will be happy to discuss, during our interview” is a line which has a high chance of getting you that interview!
Our very best wishes for your success!
For further information, you can also watch the below videos!