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.
Financial analysts are employed by mutual- and pension funds, hedge funds, securities firms, banks, 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 spreadsheets (and 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.
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 assess the value and analyze the risks of various securities, here focusing on interest rate- and fixed income securities, particularly bonds. They may further specialize, but here by issuer-type (i.e. municipal bonds, government bonds, and 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.
Typically, analysts use fundamental analysis principles, but technical analysis and tactical evaluation of the market environment are also routine. Analysts obtain information by studying public records and filings by the company, as well as by participating in public earnings calls where they can ask direct questions to the management. Additional information can be also received in small group or one-on-one meetings with senior members of management teams. However, in many markets such information gathering became difficult and potentially illegal due to legislative changes brought upon by corporate scandals in the early 2000s. One example is 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.
Financial analysts in the investment banking departments of securities or banking firms often work in teams, analyzing the future prospects of companies, and selling shares to the public for the first time via an initial public offering (IPO), or issuing bonds; this task is often identical to that of a securities analyst. On this basis, they will then make presentations to prospective investors re the merits of investing in the new company, presenting their "pitch books" on a "roadshow"; see bookrunner and securities underwriting. An additional component of the IB role here: analysts ensure that all forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete.
Many IB analysts work in mergers and acquisitions (M&A) departments, similarly preparing analyses on the costs and benefits of a proposed merger or takeover, and assisting with 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, [4] vice presidents (VPs, or Senior SVPs) will manage the workflow and deliverables—with modelling performed by Associate AVPs—but not be involved in the line-by-line detail per se. Directors will be responsible for "rainmaking" and maintaining existing client relationships. The latter role incorporates a significant advisory element—guiding the client regarding their profile and exposure in the 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 economics team or group. This team produces the economic forecasts informing the various valuations and overall investment strategy; [19] see Investment banking § Research and Economic analyst.
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.
As outlined, the job title is a broad one, and analyst-roles also include financial management and (credit) risk management.
Financial analysts within corporates [3] [20] [21] provide inputs into all elements of the firm's financial management. [22] [8] [11]
Management of these deliverables sits with the financial manager (FM); while budget analyst, cost analyst, treasury analyst or manager, and risk analyst or manager are often specialized roles. The area overall is sometimes referred to as "FP&A" (Financial Planning and Analysis). [22] [21] 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.
There are several analyst roles related to credit risk, macro or micro. [13] 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.
Financial analysts employed in commercial lending perform balance sheet analysis, examining the borrower's 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.
Some financial analysts specialize as accounting analysts; they will collect industry data (mainly balance sheet, income statement and capital adequacy in banking sector), merger and acquisition history and financial news for their clients. They then typically "standardize" the different companies' data, facilitating 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.
In general, [8] a business-related bachelor's degree majoring in Accounting, 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]
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. [29] (They will later be encouraged to earn the CFA, CIIA, or MBA.) For example, valuing financial service firms and valuing mining corporates requires specialized knowledge regarding their valuation-, regulatory-, and accounting standards; and, respectively, qualifications in actuarial science, [30] and mining engineering or geology [31] will then be required. Other sectors may similarly require specific technical qualifications: e.g. in pharmacy / life sciences for "bio-tech"; [32] in electronic engineering for (some) areas in "high tech" (e.g. semiconductors). [29]
Many large teams will also include a CPA or 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.
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Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of goods and services; the discipline of financial economics bridges the two. Financial activities take place in financial systems at various scopes; thus, the field can be roughly divided into personal, corporate, and public finance.
Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance.
Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services or research. Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket, Middle Market, and boutique market.
In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.
Financial services are economic services tied to finance provided by financial institutions. Financial services encompass a broad range of service sector activities, especially as concerns financial management and consumer finance.
Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to address them. See Finance § Risk management for an overview.
Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts/mandates or via collective investment schemes like mutual funds, exchange-traded funds, or REITs.
Financial modeling is the task of building an abstract representation of a real world financial situation. This is a mathematical model designed to represent the performance of a financial asset or portfolio of a business, project, or any other investment.
Valuation using discounted cash flows is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. In several contexts, DCF valuation is referred to as the "income approach".
Sell side is a term used in the financial services industry. The three main markets for this selling are the stock, bond, and foreign exchange market. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the buy side, or corporate entities. The sell side and the buy side work hand in hand and each side could not exist without the other. These services encompass a broad range of activities, including broking/dealing, investment banking, advisory functions, and investment research.
The following outline is provided as an overview of and topical guide to finance:
Securities research is a discipline within the financial services industry. Securities research professionals are known most generally as "analysts", "research analysts", or "securities analysts"; all the foregoing terms are synonymous. Research analysts produce research reports and typically issue a recommendation: buy ("overweight"), hold, or sell ("underweight"); see target price and trade idea.
Treasury management entails management of an enterprise's financial holdings, focusing on the firm's liquidity, and mitigating its financial-, operational- and reputational risk. Treasury Management's scope thus includes the firm's collections, disbursements, concentration, investment and funding activities.
Credit analysis is the method by which one calculates the creditworthiness of a business or organization. In other words, It is the evaluation of the ability of a company to honor its financial obligations. The audited financial statements of a large company might be analyzed when it issues or has issued bonds. Or, a bank may analyze the financial statements of a small business before making or renewing a commercial loan. The term refers to either case, whether the business is large or small. A credit analyst is the finance professional undertaking this role.
A pitch book, also called a Confidential Information Memorandum, is a marketing presentation used by investment banks, entrepreneurs, corporate finance firms, business brokers and other M&A intermediaries advising on the sale or disposal of the shares or assets of a business. It consists of a careful arrangement and analysis of the investment considerations of the client business and is presented to investors and potential investors with the intent of providing them the information necessary for them to make a decision to buy or invest in the client business. There are many contributors to an intermediary's pitch book. In an investment bank contributors may include anyone from an analyst to an associate, a vice-president or even the managing director. See Financial analyst § Investment Banking.
Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative structuring or pricing, risk management, investment management and other related finance occupations. The occupation is similar to those in industrial mathematics in other industries. The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns.
Moody's Analytics is a subsidiary of Moody's Corporation established in 2007 to focus on non-rating activities, separate from Moody's Investors Service. It provides economic research regarding risk, performance and financial modeling, as well as consulting, training and software services. Moody's Analytics is composed of divisions such as Moody's KMV, Moody's Economy.com, Moody's Wall Street Analytics, the Institute of Risk Standards and Qualifications, and Canadian Securities Institute Global Education Inc.
In finance, a contingent claim is a derivative whose future payoff depends on the value of another “underlying” asset, or more generally, that is dependent on the realization of some uncertain future event. These are so named, since there is only a payoff under certain contingencies. Any derivative instrument that is not a contingent claim is called a forward commitment.
Corporate finance is the area of finance that deals with the sources of funding, and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.
Corporate Finance Institute (CFI) is an online training and education platform for finance and investment professionals, providing courses and certifications in financial modeling, valuation, and other corporate finance topics. These are the skills CFI deems important for modern finance - such as Microsoft Excel, presentation and visuals - as well as underlying knowledge of accounting and business strategy.
