Investment Banking vs. Equity Research: What is the Difference?
Considering a career in investment banking or equity research? In the following insider’s guide, we’ll compare the differences in compensation, work flow, and lifestyle between the two careers.
The role of an equity research analyst is mainly analyzing publicly-traded equities to publish reports containing company and industry-specific insights to support a formal recommendation.
On the other hand, a career in investment banking is based around providing advisory services to clients on mergers and acquisitions (M&A), and initial public offerings (IPOs).
- Investment Banking vs. Equity Research: What is the Difference?
- What Does an Equity Research Analyst Do?
- Equity Research Report Example (PDF)
- How to Become an Equity Research Analyst
- What is the Salary in Equity Research?
- How is the Lifestyle in Equity Research?
- How is the Quality of Work in Equity Research?
- What are the Exit Opportunities from Equity Research?
- Scorecard: Investment Banking vs. Equity Research
What Does an Equity Research Analyst Do?
Equity research analysts closely analyze small groups of stocks in order to provide insightful investment ideas and recommendations to the firm’s salesforce and traders, directly to institutional investors and (increasingly) to the general investing public.
Over the course a year, research analysts communicate formally via research reports that place “Buy,” “Sell,” or “Hold” ratings on the companies they cover.
The timing of the publication of reports tend to be concentrated around earnings season (i.e. quarterly reports), as well as on an ad hoc basis.
Since equity research analysts generally focus on a small group of stocks (5-15) within particular industries or geographic regions, they become experts in the specific companies and industry or “coverage universe” that they analyze.
Analysts need to know everything about their coverage universe in order to make investment recommendations. As such, analysts constantly communicate with the management teams of their companies under coverage and maintain comprehensive financial models about these companies.
They quickly digest and respond to new information that hits the tape.
New developments and ideas are communicated to the investment bank’s sales force, traders, directly to institutional clients, and directly to the general investment public over the phone, and directly to the trading floor via an intercom system or over the phone.
Equity Research Report Example (PDF)
Curious to see what sort of analysis is performed by an equity research analyst?
Fill out the form below to download an equity research report published by JP Morgan covering Hulu.
How to Become an Equity Research Analyst
If you enjoy writing, financial analysis and getting home at a reasonable hour, equity research might be for you.
If you enjoy writing, getting involved with clients and management teams, building financial models and conducting financial analysis all while getting home at a reasonable hour (9pm vs. 2am), equity research might be for you.
Research associates (that would be your title coming in as an undergrad) go through similar training to that of sales and trading analysts.
After 2-3 months of corporate finance, accounting and capital markets training, research associates are assigned to a group led by a senior analyst.
The group is made up of zero to three other junior associates. The group starts off covering a group of stocks (usually 5-15) within a specific industry or region.
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Enroll TodayWhat is the Salary in Equity Research?
Investment banking bonuses range from 10-50% higher than equity research bonuses at the entry level.
At larger investment banks, both IB analysts and ER associates start with the same base compensation.
However, investment banking bonuses range from 10-50% higher than equity research bonuses at the entry level. The difference at some firms is even more acute.
Additionally, investment banking becomes more lucrative at senior levels (i.e. client-facing role).
The compensation difference is rooted in the economics of an investment bank vs. that of an equity research firm.
Unlike investment banking, equity research doesn’t directly generate revenue. Equity research departments are a cost center that support sales and trading activities.
In addition, despite a regulatory separation between equity research and investment banking (“Chinese Wall”), it also serves as a way to maintain a relationship with corporations — the very clients that use the investment bank to help raise capital, acquire companies, etc.
Nonetheless, research’s indirect role in the generation of revenue makes compensation generally lower.
Edge: Investment Banking
The Wharton Online & Wall Street Prep Applied Value Investing Certificate Program
Learn how institutional investors identify high-potential undervalued stocks. Enrollment is open for the Feb. 10 - Apr. 6 cohort.
Enroll TodayHow is the Lifestyle in Equity Research?
Research associates arrive to the office at 7am and leave sometime between 7-9pm.
Working on weekends is limited to special situations like an initiation report.
This schedule is very favorable compared to investment banking hours. Analysts can work up to 100 hours per week.
Edge: Equity Research
How is the Quality of Work in Equity Research?
Investment banking analysts spend a large portion of their time on monotonous formatting and presentation work.
If they’re fortunate, investment banking analysts are exposed to non-public situations such as IPOs and M&A deals from the beginning to the end of the process.
This provides real insight as to how a transaction is done from start to finish as well as how deals are actually negotiated.
In reality, however, for the first several years, the analyst’s role is somewhat limited.
They spend a large portion of their time doing monotonous formatting and presentation work. The most interesting and rewarding work is financial modeling.
Equity research associates find themselves almost immediately interacting with portfolio managers and hedge fund managers, the firm’s internal sales force and traders, and communicating the senior analyst’s investment thesis after a company reports earnings.
In addition, they develop modeling skills by constantly updating and analyzing their companies’ operating forecasts.
Another equity research benefit is that grunt work is limited to the creation of research notes and the updating of senior analysts’ marketing material.
However, unlike investment banking analysts, research associates are usually not exposed to the M&A, LBO, or IPO process from start to finish, as they are only privy to public information.
As a result, they don’t spend nearly as much time building those types of financial models. The modeling focus is primarily on the operating model.
Edge: Equity Research
What are the Exit Opportunities from Equity Research?
Equity research associates usually aspire to switch over to the “buy side” (i.e., to work for the portfolio managers and hedge fund managers that sell-side researchers disseminate reports and ideas to).
The buy-side offers the allure of an even better lifestyle, and an opportunity to actually invest (to put your money where your mouth is).
That said, the buy side is extremely competitive, even for research associates. Many associates must enhance their profile by obtaining a CFA charter and/or hitting business school before moving on up into the buy side.
Investment banking analysts typically pursue MBAs, start their own business or try to move directly into private equity after their analyst stints.
Generally, equity research is looked at as favorably as investment banking for certain buy-side firms, whereas transaction-focused firms like private equity and VC firms generally prefer investment bankers.
MBA programs generally look at investment banking and equity research equivalently, if perhaps a slight edge for investment banking.
Edge: Investment Banking
Scorecard: Investment Banking vs. Equity Research
- Compensation: Investment Banking
- Lifestyle: Equity Research
- Quality of Work: Equity Research
- Exit Opportunities: Investment Banking
In conclusion, while a career in equity research might be less glamorous than investment banking, it deserves a close look.
Hi there, I had an extremely basic question – isn’t equity research a part of investment banking? As such, when we compare ‘IB’ to ER here, are we just comparing a part of the whole to the whole? What constitutes IB (as in what kind of jobs are we comparing… Read more »
Hi
I am in my 3rd sem of PGDM and want to become an IB but before getting into IB want to do CFA .
Should I wait till the the completion of CFA or should start with any firm.
Hi I was just reading the above article and right now I have hard time deciding which one to go for I am from a finance background with CFA level 2 candidate, a 2 year degree at Bombay stock exchange covering global financial markets, b.com grad and currently working for… Read more »
I am an MBA student and confused between selection of Equity Research And IB profile. So I had few questions, Is the working hours in IB will be same throughout the career, or it will come down with the experience as at some point of time excessive working hour will… Read more »