EQUITY RESEARCH

RESEARCH OF EQUITIES WHAT IS EQUITY EQUITY IS ONE OF THE IMPORTANT ASSET CLASS

ASSET CLASS

EQUITY

BONDS

COMMODITIES

FOREIGN EXCHANGE & DERIVATIVES

IT MEANS COMMON SHARES OR STOCK OF BUSINESSESS

WHAT IS RESEARCH
DEEP UNDERSTANDING OF THE COMPANIES WHAT MAKES THEM TICK WHAT ARE THEIR STRONG POINTS

THEIR WEAKNESSESS
WHAT LIES IN FUTURE FOR THESE COMPANIES

SO EQUITY RESEARCH IS AIMED AT UNRAVELING VALUE OF COMPANIES ESPECIALLY IN EQUITY MARKETS. Equity research involves: Qualitative Analysis: analysis of the economy and the industry the business is in and Quantitative Analysis: analysis of the financial information of the company.

RELEVANCE OF RESEARCH
I WANT TO PUT MY MONEY IN STOCK WHICH LOOKS INEXPENSIVE THIS IS CALLED VALUE BUYING OR BARGAIN HUNTING (FINDING UNDERVALUED STOCK) INVOLVES CAREFUL & DETAIL STUDY OF THE COMPANY

HOWEVER THERE IS CONTINUOUS FLOW OF COMPLEX INFORMATION FROM THE COMPANY THEREFORE THERE IS NEED OF OBJECTIVE ANALYSIS ABILITY TO WEED OUT UNNECESSARY INFORMATION & ABILITY TO READ BETWEEN LINES & DECODE COMPLEX INFORMATION

SIGNIFICANCE OF RESEARCH MARKETS ARE NOT EFFICIENT & DISPLAY EITHER IRRATIONAL EXUMBERANCE OR GLOOM MARKET PRICE OF STOCK RARELY REFLECT THEIR TRUE VALUE

ABILITY TO SPOT UNDERVAUED/OVERVALUED STOCK IS WHERE RESEARCH PLAY A SIGNIFICANT ROLE.

An Equity Research analysts goal is to make a recommendation on whether the shares of a company are worth buying or selling at the current market price.
Different brokerage/investment companies use different terminologies to make their recommendations. Common terminologies are: Buy/Sell/Hold Overweight/Underweight Out perform/ Under perform Strong buy/ Strong sell Equity Research Analyst is concerned with stock / share of the company and not the company as such. A Company is different from its stock.

USE OF EQUITY RESEARCH

1. MERGERS & ACCQUISITION 2. TRADING ACTIVITIES 3. IPO & FUND OFFERINGS

4. INVESTMENT MANAGEMENT

MARKET PARTICIPANTS 1. RESEARCH PROVIDERS 2. RESEARCH USERS OR INVESTORS May be distinct entities or part of same organization

Equity Research can be:

1. Buy side research: In-house research for a company for its own investments, for example a Mutual Fund. Such research can be more neutral or un biased, as the recommendations are for in-house use. The more correct such recommendations are, the better the company performs. 2. Sell side research: Research for external entities such as customers of a brokerage house. Such research may be biased, as buy recommendations can result in more business for the brokerage. However, if such biased recommendations happen on an ongoing basis, the business will lose customers. Sell side recommendations are usually called blanket recommendations, as sell side analysts provide these reports to all their clients Buy Side Research is supposed to be more unbiased in nature. Sell Side Research would stand to gain by taking a more bullish stance on the security. This would increase transaction value and hence brokerage income.

The activity of research can comprise of : Front end research: Talking to the business being analysed. Back end research: Analysing various financial and industry information.

Is Equity research a cost centre or revenue for a business ? Is it good enough to look at the absolute return of the stock, to evaluate an analyst recommendation?

Key Terms
ADR or American Depository Receipt: An ADR is a tradeable or negotiable certificate issued by an American bank. It represents a certain number of shares of a foreign company, which have been deposited with the American bank.( look for what is GDR, IDR ??) Bellwether Stock: This is a stock which can lead the market a rise or fall in such a stock often leads a rise/fall in the overall sector or market. Book Value: The value at which an asset is carried on a balance sheet. Since the asset is subject to depreciation, the book value reduces every year. Bull & Bear Markets: Rising and falling markets, respectively. Face Value (of a share): The nominal or stated amount (in INR, in India) assigned to a security by the issuer. Also known as par value, or simply par. Does not have much significance for a share.

FIIs: Refers to Foreign Institution Investors, or companies incorporated in a country different from where they are investing. Intrinsic Value: Refers to the value of a share based on fundamental strength and future potential.Also called fair value. If, Market price is less than Intrinsic Value: share is said to be undervalued. Market price is more than Intrinsic Value: share is said to be overvalued. Market price is equal to Intrinsic Value: share is said to be fully valued. Market Capitalisation (Cap): Market Price per share * Number of Outstanding Shares of the Company. Market Capitalization (using free float) = Market Price * Number of Outstanding Shares of the Company *Free Float Factor Overheated Market: Demand-Supply mismatch, where too much money is chasing too few shares, leading to sharp price rises. Smart Money: Investments by informed or knowledgeable investors. Sunrise Industries: Growth areas which are going to play an important role in a countrys economy

Investment Bank: A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. Venture Capital Fund: An investment fund that manages money from investors seeking private equity stakes in startup and small- and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. Theoretically, venture capital funds give individual investors the ability to get in early at a company's startup stage or in special situations in which there is opportunity for explosive growth.
Hedge fund: An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

Private Equity: Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet

Stock Classifications a. Basis Market Cap: Small Cap, Mid Cap and Large Cap stocks. b. Interest Rate Sensitive Stocks: Directly affected by interest rate changes, e.g. banking sector stocks. c. Commodity Pack: stocks highly dependent on global commodity prices. d. Policy Driven Stocks: stocks whose prices get affected by change in government policy, e.g. oil companies.

e. Stocks Driven by Domestic Demand: Stocks of businesses whose demand comes domestic consumers, hence largely unaffected by global events.
f. Stocks Vulnerable to External Economies: These are the opposite of the earlier category, that is dependent on global demand, e.g. IT and BPO sector stocks. g. FII Favourites: These are stocks that are preferred by Foreign Institutional Investors (FIIs) and move in tandem with their operations; mainly the index and large cap stocks.

Fundamental analysis: is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies.

Technical analysis: is the evaluation of securities by means of studying statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value but instead use stock charts to identify patterns and trends that may suggest what a stock will do in the future