Equity research analysts employ a number of methods and conduct analysis and research of companies to deliver the best investment recommendations. Technical analysis is one such method. The combination of equity research technical analysis can yield several benefits to the stock market experts. By employing both methods, one can choose the right stocks, take the most appropriate decisions and make profits in the stock market.
Hence, in this article, we will give you an overview of the fundamentals of equity research and technical analysis. If you are looking forward to ace in the stock market, gear up your game, and becoming an equity research analyst, read till the end of this article.
What is equity research?
Equity research is referred to as the study of a company and its environment for making buy or sell decisions about investing in stocks or shares. Moreover, this research can also be pertained by an acquirer to a possible acquisition deal for determining the price at which the bid of a company’s securities will be made.
Equity researchers employ data interpretation, problem-solving skills, and various other tools for understanding and predicting a security’s behavioural outlook. Equity researchers identify patterns with present market price changes and use this knowledge for creating algorithms that are helpful in identifying profitable stock investment opportunities.
The chief purpose of equity research is to furnish investors with elaborative financial analysis and guidance on whether to buy, sell, or hold a particular investment. Banking institutions often use equity research for supporting their sales and trading and investment banking clients by providing high-quality and timely information and analysis.
Role of Equity Research
- The research plays a crucial role in filling up the information gap between the sellers and buyers of the shares.
- The reason behind this is all levels, be it individual or institutional, might not have essential tools and resources for analysing every stock.
- Moreover, as full information is not provided by the organizations, there are inefficiencies and stocks are traded above or below their face value.
- Equity research analysts employ a major portion of their time and expertise in analysing stocks, following news and trend patterns, talking to the management, and providing estimated stock valuations.
- Lastly, equity research allows individuals to identify valuable stocks from the pool of stocks and generate profits.
Role of Equity Research Analysts
The chief work of equity research is producing reports. It is essential for an equity research analyst to know the fundamental concepts of the equity market. The researchers provide flash reports to “initiating coverage” reports which are in-depth and quick as well. Another huge part of this job is financial modelling. The work of a research analyst is filled with challenges and deadlines. It is quite tough to analyse a company’s report intricately and provide recommendations of the best stocks.
The busiest time is when coverage is initiated on a specific sector or stock, as well as earnings season when reports on corporate earnings have to be analyzed quickly. Research analysts should be capable of performing complex calculations, preparing monetary statements with quick turnarounds, and running predictive models. Therefore, an equity research analysis course is helpful in rendering all the required knowledge and information for performing complex tasks.
The contents of an equity research report are as follows:
- Industry research
- Management commentary and overview
- Historical financial results
Breaking down an Equity Research Report
- Industry Research
It is one of the most important elements. This segment includes information on the competition and trends in the industry. It must also cover all the dynamics of the industry, such as economics, politics, social trends, and technological innovations.
- Management Overview
If you are planning to invest in a company’s stock, then it is highly crucial to understand the dynamics and quality of its management. So, as an individual, you might not be able to do it, but here is where the role of equity analysts come. Equity analysts have insight and direct reach to the company’s management through “analyst day”, quarterly conference calls, site visits, and many other such occasions. They can also ask direct questions to the company’s management. Research analysts can lucidly asset their competence and relay the same information to the investors.
- Historical financial results
It is important to look over the past financial results. A stock’s performance is largely constructed on reality vs expectations. Hence, it is essential to understand and analyse if a stock’s past results were at, below, or above the market expectations.
There are chiefly two methods of forecasting: top-down and bottom-up. In top-down forecasting, a researcher first looks at the industry (pricing, size, growth, etc.), and then determines a company’s market share, and then finally works down to the revenue. On the contrary, the bottom-up forecasting starts with the chief drivers of revenue, such as the amount of units sold or the number of customers, and then finally arrives at the revenue forecast.
Valuation methods involve taking all the assumptions from the forecasting and then building up on them with more assumptions, such as a discount rate or a valuation multiple. Both of these are subjective. Equity research analysts have to be great at financial modelling, and they may build DCF models and 3 statement model or as required. Financial modelling takes sheer practice and hardwork. Therefore, learning the fundamentals through an equity research course is highly beneficial.
In this section, an analyst will have a price target that tells investors where a stock is expected to be typically in a year’s time. Moreover, actual recommendations of what should or should not be done are also made to the investors in this segment. The language varies from organizations to organizations, but they may be:
Buy/ Long/ Overweight
Hold/ Neutral/ Market weight
Sell/ Short/ Under weight
It is highly recommended to learn the advanced equity market concepts, and with expertise, you will be able to make the ideal equity research report.
What is Technical Analysis?
Technical analysis is defined as a trading discipline that is employed for evaluating investments and identifying trading opportunities by analysing statistical trends that have been congregated from trading activity, such as volume and price movement. Technical analysis is used for scrutinizing the procedures by which demand and supply for security will affect changes in volume, price, and implied volatility.
This trading discipline can be used on any security’s historical trading data. This includes futures, stocks, commodities, currencies, fixed-incomes, and other securities. The assumption behind technical analysis is that past trading activity and price changes can provide helpful information for predicting a security’s future value when used in conjunction with appropriate investing or trading rules.
Technical analysts have worked on and developed a myriad of trading systems for forecasting and trading on price movements. Some indicators are chiefly focused on identifying the current market trend as well as support and resistance, while others are focused on determining the durability of the trend and its continuation. Commonly used indicators include channels, trendlines, momentum indicators, and moving averages.
The method looks over the following broad types of indicators:
- Chart patterns
- Price trends
- Volume and momentum indicators
- Moving averages
- Support and resistance levels
This is the most common charting method for showing price movement on a chart. So, a candlestick is formed during a single time period from the price action for any time frame. Therefore, a candlestick on an hourly chart indicates price action for an hour, and a candlestick on a 15-minute chart shows the price action during a 15-minute period. There are five types of time frames:
- 5-minute chart
- 15-minute chart
- Hourly chart
- 4-hour chart
- Daily chart
Candlesticks are formed as follows: The highest point of a candlestick represents the highest price a stock traded at that time period, while the lowest point of a candlestick represents the lowest price. The “body” of the candlestick (thicker parts, or red or blue blocks) indicate the opening as well as closing prices for the time period. If a candlestick that is formed is blue, then this indicates that the closing price was higher than the opening price. Whereas if it is a red candlestick, then it means that the opening price was higher than the closing price.
There is a myriad of candlestick patterns such as dojis, hammer, bullish engulfing, dark cloud cover, mat-hold, spinning top, hanging man, three inside up, the morning star, to name a few. Candlesticks offer a lucid way of determining at a glance whether the price closed lower or higher at a given time period. Analysts find it easier to perform technical analysis when using candlestick charts since they receive more visual cues and patterns. Learning about candlesticks and acquiring the appropriate knowledge is easier with the assistance of a technical analysis course. You can enrol in an online course and learn at your own pace and ease.
Assumptions made by a Technical Analyst
Professional analysts take into consideration three assumptions in this trading discipline.
- First, the market discounts everything, which is similar to the efficient market hypothesis.
- Secondly, they expect that prices, regardless of the time frame observed, will exhibit trends despite random market movements.
- Lastly, history also has a tendency to repeat itself. It is often attributed to the predictable nature of market psychology on the basis of emotions like fear and exhilaration that price movements repeat.
How to learn technical analysis and equity research?
As earlier mentioned, when your concepts are cleared, and you have an abundance of knowledge, playing in the stock market becomes a cakewalk. But, to do that, you need to have expertise and knowledge. This can come either through reading books or enrolling in a course. Both equity research and technical analysis are absolute necessities in determining the price of securities. So, instead of enrolling in two different courses, you can enrol in a combo course of equity research technical analysis by Elearnmarkets, a financial market e-learning portal, “Advanced Equity Research and Technical Analysis”.
This course is curated to provide its participants with apt theoretical knowledge and practical expertise in choosing and investing in the right stocks. This course is mentored by Abhijit Paul, a stock market giant, well-known as the “Master of Trading”. Moreover, with this course, you will be able to participate in mock trading sessions, giving you an insight into live trading sessions in the stock market.
Some of the topics covered in this combo program include:
- A comprehensive understanding of technical analysis
- Indicators and oscillators
- Art of using Fibonacci
- Quantitative analysis
- Evaluating Business Model
- Behavioural finance and its applications
- Corporate governance
- Candlestick patterns
- Chart patterns
- Evaluating Learning and Management
On completion of this course, you will receive a joint certification from NSE Academy by Elearnmarkets. Moreover, this course also opens a new avenue for becoming a successful equity research analyst as well as a long-term investor.
Equity research technical analysis is a broad and profitable method of analysing and choosing the right stocks for gaining profits. By analysing market trends, volumes, and prices, stock market traders and investors can indulge in healthy stock market trading. With the assistance of equity research, the long-term profit-making process becomes even easier.