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Securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
research is a discipline within the
financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
industry. Securities research professionals are known most generally as "analysts", "research analysts", or "securities analysts"; all the foregoing terms are synonymous. Research analysts produce research reports and typically issue a recommendation: buy ("
overweight Being overweight or fat is having more body fat than is optimally healthy. Being overweight is especially common where food supplies are plentiful and lifestyles are sedentary. , excess weight reached epidemic proportions globally, with mo ...
"), hold, or sell ("
underweight An underweight person is a person whose body weight is considered too low to be healthy. A person who is underweight is malnourished. Assessment The body mass index, a ratio of a person's weight to their height, has traditionally been used t ...
"); see
target price Target price may mean: *A stock valuation In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, pot ...
and
trade idea Trade ideas (or trading ideas, or "Electronic Alpha-Capture") are investment ideas, typically equity related, ("long" i.e. buy, or "short" i.e. sell) which are sent by institutional stockbrokers to their institutional clients (i.e. this is not a s ...
. These reports can be accessed from a number of sources, and brokerages will often offer the reports free to their customers. Research can be categorized by the security type, as well as by whether it is
buy-side research Securities research is a discipline within the financial services industry. Securities research professionals are known most generally as "analysts", "research analysts", or "securities analysts"; all the foregoing terms are synonymous. Researc ...
or sell-side research; analysts further focus on particular industries. Although usually associated with
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall state ...
, research also focuses on
technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
, and reports will often include both. See also Financial analyst #Securities firms.


Analyst specialization

Securities analysts are commonly divided between the two basic kinds of securities:
equity Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...
analysts (researching stocks and their issuers) and
fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
analysts (researching
bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
issuers); there are various other financial instruments. There are some analysts who cover all of the securities of a particular issuer, stocks and bonds alike. Securities analysts are usually further subdivided by industry specialization (or sectors)—among the industries with the most analyst coverage are
biotechnology Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used b ...
,
financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
,
energy In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of heat a ...
, and computer hardware, software and services. Analysts will regularly attend quarterly earnings conference calls; see also
earnings guidance In financial reporting, earnings guidance or simply guidance is a publicly traded corporation's official prediction of its own near-future profit or loss, stated as an amount of money per share; see Earnings call. Earnings guidance is usually a ...
. Fixed-income analysts are also often subdivided by asset class—among the fixed income asset classes with the most analyst coverage are
convertible bond In finance, a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
s, high yield bonds (see
high-yield debt In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events, ...
), and distressed bonds (see
distressed securities Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding ...
). Although technically not securities, syndicated bank loans typically fall within the domain of fixed income analysts, and are covered, as if they were bonds, by reference to the industry of their borrowers or asset class in which their credit quality would place them. See . Research can be further categorized as
buy-side research Securities research is a discipline within the financial services industry. Securities research professionals are known most generally as "analysts", "research analysts", or "securities analysts"; all the foregoing terms are synonymous. Researc ...
or sell-side research. Sell-side research is conducted by
sell-side analyst A sell-side analyst works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." T ...
s at
investment banks Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with ...
and independent equity research boutiques, and is sold to buy-side investors. Buy-side research, however, is usually not published as it is created for internal use at an
asset manager Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...
or
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
. Sell-side research is offered as part of a broad set of financial services including
broking A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
and
corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
. New regulation in Europe, Markets in Financial Instruments Directive II (
MiFID II Markets in Financial Instruments Directive 20142014/65/EU commonly known as MiFID 2 (Markets in financial instruments directive 2), is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework fo ...
), is set to change how research is bought. Research must be "unbundled" from execution costs and priced by the research provider. It has typically been accessed by institutional investors through
Thomson Reuters Thomson Reuters Corporation ( ) is a Canadian multinational media conglomerate. The company was founded in Toronto, Ontario, Canada, where it is headquartered at the Bay Adelaide Centre. Thomson Reuters was created by the Thomson Corpora ...
subscription services or
Bloomberg terminal The Bloomberg Terminal is a computer software system provided by the financial data vendor Bloomberg L.P. that enables professionals in the financial service sector and other industries to access Bloomberg Professional Services through which use ...
s but marketplaces like Research Exchange Ltd have emerged where individual research reports or subscriptions can be purchased. Independent equity research has largely sprung into existence as a result of scandals such as
Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
,
Lernout & Hauspie Lernout & Hauspie Speech Products, or L&H, was a Belgium-based speech recognition technology company, founded by Jo Lernout and Pol Hauspie, that went bankrupt in 2001 because of a fraud engineered by the management. The company was based in Ypr ...
and
Worldcom MCI, Inc. (subsequently Worldcom and MCI WorldCom) was a telecommunications company. For a time, it was the second largest long-distance telephone company in the United States, after AT&T. Worldcom grew largely by acquiring other telecommunic ...
where investment banks wrote positive research despite deteriorating fundamentals or fraudulent management.
Credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...
such as
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international ...
, Fitch, and S&P provide a similar service for bond securities. There are also a few
retail investor There are two basic financial market participant distinctions, investor vs. speculator and institutional vs. retail. Action in financial markets by central banks is usually regarded as intervention rather than participation. Supply side vs. ...
firms such as Morningstar, SEENSCO, Valueline, Zacks Investment Research and AC Investment Research.


Regulations


Qualifications

Qualifications for investment professionals very by country, with many countries having specific examination boards which handle certification.


In the United States

In the US, as of 2002, investment professionals seeking to become sell-side equity research analysts must pass the Research Analyst examination administered by
FINRA The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...
. The exam is divided into two parts: 86 and 87. The Series 86 Research Analyst exam is the Quantitative portion consisting of material from introductory economics and financial accounting. The Series 87 Research Analyst exam is the Regulatory portion consisting of material from the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
,
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A landma ...
, NASD and NYSE Rules. Prior to the update to the FINRA licensing exams in 2018, the
Series 7 Series 7 may refer to: *The seventh season of any of many shows or series; see and *Series 7 exam, officially the General Securities Representative Exam, the most comprehensive financial securities exam offered by the FINRA *'' Series 7: The Conte ...
examination/license was a pre-requisite for the Research Analyst exams. Now, candidates must pass the Securities Industry Essentials exam before taking the Series 86 and 87. The Series 7 Top-Off and Series 63 exams are sometimes required at the state-level for research analysts. Successful completion of the CFA level I & II exams provides a waiver for the Series 86 exam, but not the Series 87 examination.


In

Hong Kong Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...

In Hong Kong, investment professionals must pass the Paper 1 administered by the Hong Kong Securities Institute. Passing this exam allows the individual to receive the Type 4 license to be a publishing research analyst in Hong Kong.


Industry rules

Buy-side and independent research are generally unregulated. Sell-side research is subject to regulation by the securities authorities of the locales where it is performed. The large majority of all sell-side research is performed either in the United Kingdom or the United States. UK sell-side research is regulated by the
Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...
. US sell-side research has a more complex regime of regulation. The U.S.
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
has prescribed certain relevant rules (among them Regulation AC and Regulation FD) but has generally delegated research regulation to the
self-regulatory organization A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could exist in place of government regulation, or applied in addition to governmen ...
s. The principal SROs (the
National Association of Securities Dealers The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...
and the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
) have issued detailed regulations of equity research, and much more cursory regulation of fixed income research. (With respect to the latter, the NYSE and the NASD have re-delegated the substance of regulation to the broker-dealer trade group
Securities Industry and Financial Markets Association The Securities Industry and Financial Markets Association (SIFMA) is a United States industry trade group representing securities firms, banks, and asset management companies. SIFMA was formed on November 1, 2006, from the merger of the Bond Mar ...
as the merger successor of the Bond Market Association, to whom the role was originally assigned.) The impact upon securities research regulation of the pending merger of the NASD with the regulatory arm of the NYSE is currently uncertain. In the immediate aftermath of the excesses of the 1990s referred to above,
Eliot Spitzer Eliot Laurence Spitzer (born June 10, 1959) is an American politician and attorney. A member of the Democratic Party (United States), Democratic Party, he was the 54th governor of New York from 2007 until his resignation in 2008. Spitzer was b ...
, Governor of the State of New York, asserted a significant role in policing securities research performed by New York-based analysts; it is unclear whether oversight by the New York State Attorney General will become a long-term meaningful component of securities research. The going-forward conduct provisions of a master settlement agreement between (on the one hand) most of the aforesaid U.S. regulators and (on the other hand) many of the largest U.S. broker-dealers, is an important source of ongoing regulation, with the force of law for the broker-dealers who are party to it, and a strong, if not formally legally binding effect, on broker-dealers not party to it. The latest rule changes are coming into effect in Europe under
MiFID II Markets in Financial Instruments Directive 20142014/65/EU commonly known as MiFID 2 (Markets in financial instruments directive 2), is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework fo ...
. Research has been deemed an inducement to trade and must be "unbundled" from execution costs. The new rules around Research Unbundling are viewed as a major challenge by asset managers as they materially alter the way in which research has been consumed. Research budgets must be set in advance, payments for research separated from execution, the quality of research regularly assessed, and auditable records of consumption and payments kept. New platforms launched in anticipation of the rules coming into effect. At the same time, accelerator-type initiatives like Boost Research are being created to help independent analysts set up their own businesses for providing independent research and analysis.


References

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Further reading


Barron's on Off Wall Street Consulting Group, July 31, 2010

Frost Consulting, Commission Unbundling Basics
Financial services occupations Securities (finance)