A financial analyst is a professionalMarshall D. Ketchum (1967). "Is Financial Analysis a Profession?". Financial Analysts Journal. Vol. 23, No. 6 (Nov. - Dec., 1967) undertaking financial analysis for external or internal clients as a core feature of the job.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"Financial Analyst", Princeton Review The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, or ratings analyst.Financial Analysts, Bureau of Labor StatisticsFinancial Analysts, collegegrad.com The job title is a broad one:What does a financial analyst do?, Rasmussen CollegeFinancial Analyst job description guide, Robert HalfFinancial Specialists, Bureau of Labor Statistics 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.
Role Financial analysts can work in a variety of industries. A large proportion of them 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. In corporate roles, financial analysts perform budget, revenue and cost modelling and analytics as part of their responsibilities; credit analysis is likewise a distinct area.Credit Analysts, Bureau of Labor Statistics
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 for an overview, and for the various roles.
Securities firms
In a stock brokerage house or investment bank, the Investment Analyst will read company financial statements - applying financial statement analysis - 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 provides a rating recommending an investment action: buy, sell, or hold the security. Senior analysts may make the decision to buy or sell for the company or client if they are 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 .
Usually, financial analysts study a specific industry—called "sector specialists"—assessing current trends in business practices, products, and industry competition. 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.Laura Lindsey, Simona Mola (2013).Analyst Competition and Monitoring: Earnings Management in Neglected Firms, DERA Working Paper 2013-04
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.
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 financial statements analysis, including accounting analysis and ratio analysis, but also consider overall economic situation and specific factors including interest rates, employment, production, management and tactical evaluation of the market environment. 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% — while those with low coverage underperformed by 0.7%. See Neglected firm effect.
Investment banking
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 for 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 . 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.Stephanie Overby and John Labate (2021). Tax Planning to Drive M&A Transaction Value, Wall Street Journal
At more senior levels, vice presidents (VPs) or Senior VPs will manage the workflow and deliverables—with modelling performed by Associate VPs—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 activityShaun Beaney, Katerina Joannou and David Petrie What is Corporate Finance?, Corporate Finance Faculty, ICAEW, April 2005 (revised January 2011 and September 2020) (and liaising with sales and trading).
Investment banks, and large trading houses, often employ an economics team or group, led by a chief economist. This team produces the economic forecasts informing the various valuations and overall investment strategy;"Economic Analyst", investopedia.com see and 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.
Corporate Treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring; see . It is then (co)responsible for the bank's funds transfer pricing (FTP) framework, allowing for comparable financial performance evaluation among business units Product Control is primarily responsible for "explaining" the P&L; i.e.: attributing returns to individual bank treasury desks on a daily basis, 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 quant team, possibly front office, but maintained by Product Control. Credit Risk monitors the bank's debt-clients on an ongoing basis, as described below; it is additionally responsible for tracking the risk capital and risk adjusted returns on these clients, and reporting re concentration risk and risk appetite.
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 .
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 corporatesCareers in Finance. §1.4 in Financial Analyst Job Description, Corporate Finance Institute provide inputs into all elements of the firm's financial management.Financial Managers, Bureau of Labor Statistics
The short term focus is on working capital management, and includes tasks such as profitability analysis, cost analysis, variance analysis, and cash flow forecasting (often overlapping treasury management).