Comparison between equity research and investment banking
The top talent may no longer always choose investment banking as their career of choice. Top graduates are increasingly choosing professions in management consulting, technology, or founding their own firms rather than flooding into investment banking. Despite lengthy hours and a demanding workplace, investment banking nevertheless draws in a lot of professionals despite its diminished appeal. Another stop for potential financial staff is equity research.
Some people think of equity research as the less glamorous, lower-paid relative of investment banking. Contrary to this generally held belief, reality is different. Here is a side-by-side comparison of equities research (sell-side research carried out by the research divisions of broker-dealers) and investment banking in 10 major areas to assist you in forming your own view.
Equity Analysis
To assist portfolio managers in making more educated investment choices, equity analysts examine stocks. To comprehend and forecast a particular security's behavioural perspective, equity researchers use a variety of approaches, including problem-solving techniques, data interpretation, and other tools.
This often entails statistically evaluating statistical data for a stock in connection to previous market behavior. Finally, equities researchers may be charged with creating screening tools and investing models that assist uncover trading tactics that lower portfolio risk.
It is the responsibility of equity researchers to spot trends in the movement of market prices and to use this knowledge to develop algorithms that pinpoint successful stock trading possibilities. To cross-compare local and overseas companies, the equity researcher must be able to comprehend the unique characteristics between different international markets.
The wage range has a low end of $50,000 and a high end of around $135,000. Equity researchers' primary employers are private equity firms and other financial services providers. Although businesses are increasingly providing roles in significant metropolitan centers like Chicago, Boston, and San Francisco, the bulk of these jobs are located in New York City.
Financial Trading
The generation of capital for other businesses, governments, and other organizations is the focus of the particular branch of banking known as investment banking. Investment banks deal with the selling of securities, mergers and acquisitions, reorganizations, and broker transactions for both institutions and individual investors. They also underwrite new debt and equity securities for all kinds of firms.
Investment banks also advise businesses on the issuing and placement of shares. Investment banking employs a wide range of people, including consultants, banking analysts, capital market analysts, research associates, trading specialists, and many more. Each requires a certain degree of training and expertise.
For any financial job, a degree in finance, economics, accounting, or mathematics is a solid place to start. In fact, for many entry-level commercial banking jobs like teller or personal banker, this can be all you need.
Any banking job benefits greatly from having strong people skills. Even devoted research analysts spend a significant amount of time working in teams or providing counselling to customers. While certain jobs call for more of a sales touch than others, it's important to feel at ease in a work-related social setting. Communication abilities (explaining ideas to customers or other departments) and a high level of initiative are additional crucial qualities.
Key variations
1. Work-Life Harmony
The obvious winner in this case is equity research. Although stock research associates and analysts often work 12-hour days, there are at least brief periods of relative tranquillity. The busiest periods are when coverage is first launched for a certain industry or company, as well as during earnings season when quick analyses of corporate earnings reports are required.
Investment banking analysts, who are at the bottom of the totem pole, often put in 90 to 100-hour workweeks, although this only happens sometimes and generally during peak periods.
The unreasonable hours that investment banking analysts seek have come under increasing criticism. Although this has led to some Wall Street businesses reducing the amount of hours worked by junior bankers, these limitations may not have much of an impact on the investment banking industry's "work hard, play hard" attitude.
The main reason people leave investment banking is because there is no work-life balance, which causes burnout. It is uncommon for anyone working in equity research to voice that criticism.
Key financial centers like New York, Chicago, London, and Hong Kong tend to have a concentration of major financial employment. Equity research analysts and particularly investment bankers, many of whom are compensated to move to the city where their company is headquartered, are no different in this regard.
2. Manifestation
In this regard, equity research triumphs as well. The names of associates and junior analysts are often included on research reports that are sent to a firm's sales team, customers, and media sources as acknowledgment for their efforts.
Senior analysts are sought out by the media for views on the firms they cover when they report profits or make a significant announcement since they are acknowledged authorities on the companies in their industry.
On the other hand, investment bankers labor in relative obscurity at the entry level. However, as they climb the investment banking ladder, especially if they are a part of a team that works on significant, well-known projects, their visibility significantly increases.
3. Development
In this case, investment banking triumphs. The road to job advancement in investment banking is straightforward and has certain time limits. This starts with an analyst job (two to three years), moves on to an associate position (three or more years), and then one is in line to become a vice president, then a director or managing director, and finally a director or managing director.
Although there is less clarity on the career path in equities research, it often follows associate, analyst, senior analyst, and vice president or director of research. Investment bankers, however, may have a higher chance of rising to the top inside the company since they negotiate deals and maintain connections with the largest customers.
On the other side, research analysts could be seen as just data crunchers who lack the same capacity to attract significant business.
4. Job Purposes
Additionally, investment banking likely prevails in this situation, but only in the long run. Under the direction of the analyst who is in charge of covering a particular industry or set of firms, equity research associates begin their work by doing a significant amount of financial modeling and analysis.
However, associates also have limited communication with the firm's traders and sales representatives, senior management of the firms covered, and buy-side customers. There isn't a lot of variation in the associates' and analysts' jobs; rather, their duties gradually shift from financial modelling to a higher extent of report writing and developing investment views and theses. The amount of time spent on each of these tasks varies.
Contrarily, investment bankers devote their first several years of employment on pitchbooks and presentations, as well as comparative analysis and financial modelling. However, as they go up the corporate ladder, they have the chance to work on thrilling transactions like mergers and acquisitions or initial public offerings.
Rarely, when a particular transaction involving a firm they are intimately familiar with requires their assistance, are research analysts brought "over the wall" (the "wall" refers to the legally required barrier between investment banking and research).
5. Qualifications and Titles
Any aspirant equity research analyst or investment banking associate must have a bachelor's degree. Even though physics and biology, which are also analytical fields, are common areas of study, it is highly unlikely that a bachelor's degree will be sufficient to secure employment in these fields.
Investment bankers and equity researchers might be distinguished by their post-graduate education. Investment bankers often have a Master of Business Administration (MBA) degree, whereas the majority of equity researchers hold the Chartered Financial Analyst (CFA) qualification.
Anyone interested in a career in equity research now almost certainly needs to have the CFA, which is widely recognized as the gold standard for security analysis. Although a CFA program can be completed for a small portion of the price of an MBA program, it is a demanding program that demands a lot of dedication over a long period of time. Unlike an MBA class, which offers an immediate professional network, the CFA is a self-study program.
The MBA curriculum is better suited for the investment banking industry than the CFA because it is less focused on investments and more business-oriented than the CFA. However, getting into the top business schools—where the majority of Wall Street firms hire their associates—is extremely competitive. Many aspirant investment bankers begin working in another financial industry, such as as analysts or advisors, while pursuing their MBA.
Investment bankers should be extremely knowledgeable about the financial markets, investments, and corporate structure. To prove their understanding, many work for their Series 7 or Series 63 FINRA certifications.
Investment bankers' most typical career path entails graduating from a prestigious university and then working for a significant international bank, like Goldman Sachs or Morgan Stanley. The aspirant investment banker returns after a few years to finish their MBA or obtain their professional credentials. After all is said and done, it could take five to six years to be considered for an investment banking position after receiving an undergraduate degree.
6. Ability Sets
Both positions demand a significant amount of analytical and mathematical/technical skills, but equity research analysts in particular must possess these qualities. These analysts must be able to carry out intricate calculations, run predictive models, and quickly prepare financial statements.
As was already mentioned, both investment bankers and research analysts in their early careers frequently engage in financial modelling and in-depth analysis. Later, the skill sets diverge as investment bankers are expected to be skilled at deal closing, handling significant transactions, and managing client relationships.
On the other hand, research analysts must be proficient communicators both orally and in writing, as well as be able to make fair judgments after thorough investigation and due diligence.
7. Outside Possibilities
Successful research analysts and investment bankers often never lack for outside opportunities due to their experience, competence, and talents. Research analysts are more likely to choose the buy-side over venture capital or private equity companies, although experienced investment bankers often do so (i.e., money managers, hedge funds, and pension funds).
8. Restrictions to Entry
Both investment banking and equity research have high entry requirements, though equity research might have slightly lower ones. While joining a sell-side business as an equities analyst or senior analyst is usual for a professional with several years of industry expertise, it happens less often in the investment banking sector.
9. Interest Conflicts
Conflicts of interest are something that both investment bankers and research analysts must avoid, although in equities research they are more of a problem. The SEC's enforcement proceedings against 10 top Wall Street companies and two-star analysts in 2003 related to analyst conflicts during the telecom/dot-com boom and crash of the late 1990s and early 2000s served as a reminder of this.
One of the biggest sums ever levied in civil securities enforcement cases, the businesses agreed to pay disgorgement and civil penalties totalling $875 million as part of the settlement. The 10 companies also agreed to implement a number of organisational changes that would totally separate their research and investment banking divisions.
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