For most people looking to become financial analysts, there is a single question that pops up frequently. How to determine the winner of the equity research vs. credit research battle? The most general difference between the two is that equity research is focused on stocks, while credit research deals with bonds and credit.
However, their differences are not so simple. They go way deeper. To help you understand these two, we’ve decided to make this short guide that will help you make the right decision when the time comes. The world of finance is not always so simple to understand, and you need to get informed to make sense of it all.
Before we go further, we should first discuss the conceptual differences between the two. These differences can help you understand why there was a need for the two different practices in the first place.
Conceptual Difference between equity research vs. credit research
Equity research is done for the sole purpose of discovering the value of a certain company that is currently listed in the stock exchange. You can observe the financial performance of this company from several different angles and learn about its growth and stability.
Some of the things that can tell you this are:
– Growth rate
– Competition performance
– Company’s market size
Once you understand the complete finances of a company, the next step is to go through its balance sheet or financial statement. After that, the current performance and the performance in the past are compared to create a financial statement analysis. In the end, equity researchers rely on various financial models to determine the accurate price.
Equity research has a vital role to play in providing valuable information for both company sellers and buyers.
Credit research is a process which involves various qualitative and quantitative methods to draw important conclusions from data. In most cases, the goal is to determine how much a certain entity is worth. All this is done while giving appropriate recommendations concerning the risks and needs of that entity.
Credit research is also focused on identifying, evaluating, and mitigating the risks associated with a certain entity. Credit research experts are in charge of:
- Gathering and analyzing various client financial data. This includes payment history, financial habits, savings, purchases, and earnings.
- After gathering all the relevant financial data and analyzing it, the analyst draws valuable conclusions and gives recommendations to customers.
Banks are a common example for credit analyst work as they have to collect client data concerning default payments. After the data has been analyzed, a credit analyst recommends actions like reducing the credit line or closing the card account. Additionally, credit analysts can also help evaluate whether new clients can get new credit or get credit extensions.
Equity research vs. credit research career prerequisites
To become an equity researcher, you will have to get an adequate educational qualification. This means either having a bachelor’s degree in economics or finance. Having a CFA or MBA can serve as a bonus. The person needs to have good analytical skills that can be used during:
- Report writing
- Accounting skills
- Financial modeling
An equity researcher also needs to have great communication skills, both written and verbal. This is because communicating with clients regularly is an integral part of the job, and not all of them have a clear understanding of financial terms. Additionally, some extra skills that help equity researchers do their jobs are proper time management, multitasking, and prioritizing.
Credit research analysts also need a bachelor’s degree in economics, finance, or some similar field. Having an MBA, CMA, ICWA, CA, or some other post-graduate degree from the finance field is an added benefit. Credit research professionals need to have an interest in credit appraisals and establishing improved trade ideas.
Additionally, credit research should have the knowledge to identify and understand loan issues in financial statements. The job includes creating and maintaining different credit risk models while constantly monitoring credit systems.
The crucial role of credit research professionals is to study and analyze the loan and debt performance of a client. The job also involves creating credit strategies, calculating the ROI, and interest rates.
Equity research pros and cons
Pros of equity research:
– Equity researches also work in stock analysis while using various valuation methods.
– A lot of equity evaluation professionals look for undervalued stocks and help investors invest in their portfolio.
– Equity evaluations help analysts and investors identify risks through factors such as low liquidity, high debts, and others.
– Equity researchers help assess the importance of corporate moves like mergers, buyouts, acquisitions, and so on.
Cons of equity research:
– Choosing the right valuation method can sometimes be difficult, depending on the equity and the best approach.
– Even when done properly, equity research can lead to wrong investments and flawed valuation as this practice ignores intangible assets.
– Equity research involves various assumptions based on which investment decisions and valuations are made. However, these assumptions aren’t always right.
Credit research pros and cons
Pros of credit research:
- Credit research helps lenders understand the buyer’s creditworthiness through various factors like market positioning, payment behavior, and so on.
- Credit research involves gathering and analyzing a lot of market data like marketing, PR, trends, market share, and so on.
- Credit research helps buyers assess the risks they are exposed to.
Cons of credit research:
- The whole credit industry is based on trust between buyers and lenders. This means that all of the research can sometimes be useless if the trust is broken.
Although these two have their similarities, they have different roles to play. This is why investors need to talk to specialized professionals that can help them understand whether a certain project is worthwhile or not. Companies like Research Optimus Team provide this kind of research to make investments safer.
- 1 Conceptual Difference between equity research vs. credit research
- 2 Equity research vs. credit research career prerequisites
- 3 Credit research
- 4 Equity research pros and cons
- 5 Credit research pros and cons
- 6 Conclusion