Financial analyst

In a stock brokerage house or investment bank, the analyst will 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 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 ("sector specialist"), 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. A 1999 paper by Ezra Zuckerman found that, as equity analysts divide securities by discrete sectors, companies which fall outside or across multiple sectors are punished in the ratings of analysts [2]

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. 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.

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 organisations. 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.

Traditionally, 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 conference 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 per cent.[3]

See Investment banking #Corporate finance.

Financial analysts in the investment banking departments of securities or banking firms often work in teams, analyzing the future prospects of companies selling shares to the public for the first time, via an initial public offering, 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: analysts ensure that all forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete. IB analysts similarly work in mergers and acquisitions (M&A) departments, preparing analyses on the costs and benefits of a proposed merger or takeover; here there are both buy-side- and sell-side analysts. See Investment banking #Research and Chinese wall #Finance.

At more senior levels, "vice presidents" (VP, or SVP) will manage the workflow and deliverables (modelling performed by "associate" AVPs), but not be involved in the 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 re their profile and exposure in the capital markets, and advising on M&A and other corporate activity (and liaising with sales and trading).

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.

• Corporate Treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.
• Product Control are primarily responsible for "explaining" the P&L; i.e.: attributing returns to individual desks, decomposing these into their risk factors, and ensuring that traders' positions are reflected at their market values; the tools here are often built by a separate quants team, possibly front office, but maintained by Product Control.
• Credit Risk monitors the bank's debt-clients on an ongoing basis, as described below; but additionally, monitors the risk capital and risk adjusted returns on these clients, and also reports re concentration risk and risk appetite.

These areas allow "Finance" to advise Senior Management re the firm's global risk exposure and the profitability and structure of the firm's various businesses.

Corporate analysts provide inputs into all elements of the firm's financial management: short term working capital management, including tasks such as profitability analysis, variance analysis, and treasury management (often a specialized role); and medium term budgeting and planning (and corporate strategy), their models here forming the basis for financial forecasting, scenario analysis, and balance-sheet optimization. The latter, extends to involvement with dividend policy, and capital structure; relatedly, their forecasts also feed into group ALM. Analysts are also involved with long term "capital budgeting", i.e. decisions relating to "project" selection and valuation and related funding decisions. A short-term or budget focused analyst may be designated "financial manager" (FM). 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. 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 audited financial statements and corollary data in order to assess lending risks. In retail banking, credit analysts build models to determine an applicant's creditworthyness, assign an initial credit score, and monitor this and the loan on an ongoing "behavioral" basis. In the latter two roles, impairment- and provision-modelling are often a prominent deliverable; the probability of default and loss given default statistics 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, a business related Bachelor's degree majoring in Accounting, Finance, or Economics is a minimum requirement for an entry or junior role (as well as proficiency in Excel - see Financial modeling#Accounting). Often, more senior analysts are expected to then earn an MBA, having gained 2–3 years experience in the junior role. Increasingly, it is preferred that, even to enter, analysts hold a master's degree in finance. For credit related roles, an actuarial qualification, or the FRM / PRM is often required. In corporate roles, a professional accounting certification - the CPA, CA or CIMA - is typically a prerequisite.

In securities and IB roles, it is lately preferred that, similarly, even to enter, analysts earn a master's and / or the CFA designation, with the MBA still common at senior levels. There are also many 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, 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 sector-specialists - with approx. 5 years industry experience - less weight is placed on finance qualifications, as a relevant advanced degree or qualification in the field is often critical. (They will later be encouraged to earn the CFA / MBA.) For example, valuing financial service firms and valuing mining projects particularly, requires specialized knowledge re. valuation-, regulatory-, and accounting standards; and, respectively, qualifications in actuarial science, and mining engineering / geology will be required. Other sectors may similarly require specific technical qualifications: e.g. in pharmacy / life sciences for "bio-tech"; in electronic engineering for areas in "high tech".

Most large teams will also include a CPA or CA in a dedicated technical role. (In the Commonwealth, the CA qualification often remains sufficient to access (junior) analyst roles.) Large trading houses, and Banks, often employ an economics team, usually lead by a PhD in the discipline, while a masters in economics is the typical requirement to join the team; see Investment banking #Research. This team produces the economic forecasts informing the various valuations and investment strategy. Banks often recruit analysts with accounting qualifications to the Middle Office roles.