Financial analyst

Source: Wikipedia, the free encyclopedia.

A financial analyst is a professional,[1] undertaking financial analysis for external or internal clients as a core feature of the job.[2][3][4] The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, or ratings analyst.[5][6] The job title is a broad one:[7][8][9][10] in banking, and industry more generally, various other analyst-roles cover financial management and (credit) risk management, as opposed to focusing on investments and valuation; these are also discussed in this article.

Role

Financial analysts can work in a variety of industries. A large proportion of them are employed by

investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions.[5] In corporate roles, financial analysts perform budget, revenue and cost modelling and analytics as part of their responsibilities;[9][11][12] credit analysis is likewise a distinct area.[13]

Financial analysts invariably use

statistical software
packages) to analyze financial data, spot trends, and develop forecasts. The analyst often also meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness.

Analysts specializing in advanced

mathematical modeling and programming are referred to as "quants"; see Finance § Quantitative finance for an overview, and Quantitative analysis (finance) § Types
for the various roles.

Securities firms

In a stock

brokerage house or investment bank, the analyst will[3] 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. On the basis of their results, they write reports and make presentations, usually making recommendations—a "trade idea
"—to buy or sell a particular investment or security.

Typically, at the end of the assessment, an analyst would provide a rating recommending or investment action: to buy, sell, or hold the 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, "junior" analysts use the data to model and measure the financial risks associated with making a particular investment decision. See Securities research § Career path.

Usually, financial analysts study a specific industry—called "sector specialists"—assessing current trends in business practices, products, and industry competition.[6] Among the industries with the most analyst coverage are biotechnology, financial services, energy, mining and resources, and computer hardware, software and services. Analysts 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. As equity analysts divide securities by distinct sectors, companies which fall outside or across multiple sectors are sometimes neglected; the impact on returns (and on "earnings management") here is debated.[14][15]

Analysts also specialize in fixed income. Similar to equity analysts, fixed income analysts

corporate bonds; the latter specialization is often decomposed into convertible bonds, high-yield bonds, and distressed bonds; some cover syndicated loans. The reporting focuses on the ability of the issuer to make payments—similar to the credit analysis described below—but also on the relative value of the security in question, and in context of the overall market and yield curve. See Fixed income analysis
.

Analysts are generally divided into 'sell-side' and 'buy-side'. The buy-side is sometimes considered more prestigious, professional, and scholarly, while the sell-side may be higher-paid and more like a sales and marketing role. It is common to begin careers on the sell-side at large banks then move to the buy-side at a fund.

  • A sell-side analyst's work is not used by its employer to invest directly, rather it is sold either for money or for other benefits by the employer to buy-side organizations. Sell-side research is often used as 'soft money' rather than sold directly, for example provided to preferred clients in return for business. Writing reports or notes expressing opinions is always a part of "sell-side" (brokerage) analyst job and is often not required for "buy-side" (investment firms) analysts. It is sometimes used to promote the companies being researched when the sell-side has some other interest in them, as a form of marketing, which can lead to conflicts of interest.
  • A buy-side analyst, such as a
    fund manager, works for a company which buys and holds stocks itself, on the analyst's recommendation. As they gain experience, analysts often move from buy-side research, concerning individual securities and sectors, into portfolio management itself, selecting the mix of investments for a company's portfolio. They may also become fund managers and manage large investment portfolios for individual investors
    .

Typically, analysts use

Regulation FD
(Fair Disclosure) in the United States. Many other developed countries also adopted similar rules.

Analyst performance is ranked by a range of services such as StarMine owned by Thomson Reuters or Institutional Investor magazine. Research by Numis found that small companies with the most analyst coverage outperformed peers by 2.5 per cent — while those with low coverage underperformed by 0.7%.[16] See Neglected firm effect.

Investment Banking

Financial analysts in the

Securities and Exchange Commission
regulations are accurate and complete.

Many IB analysts work in

regulatory submissions; here there are both buy-side- and sell-side analysts. See Chinese wall § Finance. The analysis is somewhat more specialized than for an IPO, as it must consider valuation pre- and post-merger, a function of efficiencies, synergies, or increased market share, financing employed, including M&A specific considerations such as the swap ratio, and tax optimization, both re the transaction and for the new entity.[17]

At more senior levels,

capital markets, and advising on M&A and other corporate activity [18] (and liaising with sales and trading
).

Investment banks, and large trading houses, often employ an

Economic analyst
.

Middle office

Within banking, there are other non-quant analyst roles (not necessarily titled "financial analyst"), mainly within the "middle office"; these are generally linked, at least by dotted line, to both the Finance and Risk Management areas.

These areas, together with the various dedicated Risk Groups, allow the Finance department to advise senior management regarding the firm's global risk exposure and the profitability and structure of the firm's various businesses; see Financial risk management § Banking.

A comptroller (or financial controller) is a senior position, responsible for these analyses and internal control more generally, usually reporting to the bank's chief financial officer, as well as copying the chief risk officer.

Corporate and other

As outlined, the job title is a broad one, and analyst-roles also include financial management and (credit) risk management.

Financial planning and analysis

Financial analysts within corporates[3][20][21] provide inputs into all elements of the firm's financial management.[22][8][11]

  • Analysts are also involved with long term "
    debt capital markets
    team, "DCM", responsible for securing and managing long-term funding.
  • Three lines of defence
    .

Management of these deliverables sits with the

financial director
or chief financial officer (FD, CFO) has primary responsibility for managing the company's finances, including financial planning, management of financial risks, record keeping, and financial reporting.

Credit analysts

There are several analyst roles related to

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
.

Financial analysts employed in

audited financial statements and corollary data in order to similarly assess lending risks, and to confirm that yield is appropriate given risk; this task is both upfront and on a monitoring basis thereafter. The focus is on current and forecasted debt- and liquidity ratios generally, and specifically those related to any loan covenants, such as debt service coverage ratio (DSCR) and loan-to-value ratio
(LTVR).

In retail banking, credit analysts build models to determine an applicant's creditworthiness, assign an initial credit score, and monitor this and the loan on the basis of an ongoing "behavioral" score. In this and the latter role, impairment- and provision-modelling are a prominent deliverable (see IFRS 9); the probability of default (PD), exposure at default (EAD) and loss given default (LGD) statistics or models are (often) provided by a separate (but dedicated) credit-quant team.

Accounting analysts

Some financial analysts specialize as

peer group analysis: the main objective here is to enable their clients to make better decisions about the investment across different regions. They also provide the abundance of financial ratios
calculated from the data gathered from financial statements, and possibly other sources.

Qualification

General

In general,

in Finance, or in Economics is a minimum requirement for an entry or junior role. Given the nature of the work, (some) proficiency in Excel is typically a recommendation (and analysts may be expected to learn database software "on the job");[20][3] see further under Financial Modeling
.

With seniority, often, analysts are expected to earn an

MBA,[3] having gained 2–3 years experience in the junior role. Increasingly, it is preferred that, even to enter, analysts hold a Master of Finance degree.[24]

More specific qualifications may be required additionally:[8]

Securities and Investment banking

In securities and IB roles,[5] it is lately preferred that, similarly, even to enter, analysts earn a Master of Finance or the CFA designation—in Europe, the CIIA also—with the MBA still common at senior levels.

Often, there are also regulatory requirements. For example, in the United States, sell-side or Wall Street research analysts must register with the Financial Industry Regulatory Authority (FINRA). In addition to passing the General Securities Representative Exam (Series 7), these candidates must pass the Research Analyst Examination (Series 86/87) in order to publish research for the purpose of selling or promoting publicly traded securities. For other jurisdictions, see List of securities examinations.

For sector specialists—with approximately five years industry experience—less weight is placed on finance qualifications, as a relevant advanced degree or qualification in the field is often necessary.

semiconductors).[29]

Many large teams will also include a

CA in a dedicated technical role. (In the Commonwealth, the CA qualification is often sufficient to access (junior) analyst roles.[33]
) Banks often also recruit analysts with
accounting qualifications
to the middle office roles. The economics team is usually
led by a PhD in the discipline, while a masters in economics is the typical requirement to join the team.

See also

Notes

  1. ^ Marshall D. Ketchum (1967). "Is Financial Analysis a Profession?". Financial Analysts Journal. Vol. 23, No. 6 (Nov. - Dec., 1967)
  2. ^ See generally: Leon Wansleben (2012) 'Financial Analysts' In: K. Knorr Cetina & A. Preda (eds.), Handbook of the Sociology of Finance, Oxford: Oxford UP, pp. 250–271
  3. ^ .
  4. ^
    Princeton Review
  5. ^ a b c Financial Analysts, Bureau of Labor Statistics
  6. ^ a b Financial Analysts, collegegrad.com
  7. Rasmussen College
  8. ^ a b c d e Financial Managers, collegegrad.com
  9. ^ a b Financial Analyst job description guide, Robert Half
  10. ^ Financial Specialists, Bureau of Labor Statistics
  11. ^ a b Financial Managers, Bureau of Labor Statistics
  12. ^ a b Budget Analysts, Bureau of Labor Statistics
  13. ^ a b Credit Analysts, Bureau of Labor Statistics
  14. S2CID 143734005
    .
  15. ^ Laura Lindsey, Simona Mola (2013).Analyst Competition and Monitoring: Earnings Management in Neglected Firms, DERA Working Paper 2013-04
  16. ^ Walker, Owen (2018-02-03). "Brokers and Managers Grapple with Mifid 'Inducement' Rule". Financial Times.
  17. Wall Street Journal
  18. ICAEW
    , April 2005 (revised January 2011 and September 2020)
  19. ^ "Economic Analyst", investopedia.com
  20. ^ a b Financial Analyst Job Description, Corporate Finance Institute
  21. ^ a b "Financial Planning and Analysis (FP&A) Professional". CareerNavigator.AccaGlobal.com. Association of Chartered Certified Accountants. Retrieved 2023-07-07.
  22. ^
    Association for Financial Professionals
  23. . Retrieved 12 November 2011. §39 "Corporate Planning Models". See also, §294 "Simulation Model".
  24. usnews.com
    , Feb. 9, 2015.
  25. ^ Top Executives, collegegrad.com
  26. ^ The Rise of the Chief Risk Officer, Institutional Investor (March 2017).
  27. ^ C. Morah (2021). Analyzing a Career in Credit Analysis, investopedia.com
  28. ^ "How Do I Become a Credit Analyst?". Retrieved 2016-07-07.
  29. ^ a b Equity Research Recruiting: The Definitive Guide, Luis Miguel Ochoa
  30. ^ Career Paths for Actuaries
  31. ^ "Inside the World of the Mining Analyst". Investec.com.
  32. ^ Biotech Equity Research, Brian DeChesare
  33. ^ See e.g. "Career Paths" as discussed by SAICA

[1]

Further reading

  1. ^ "Quantitative Analyst: Career Path and Qualifications". Investopedia. Retrieved 2023-11-26.