Fundamental research forms the basis of most financial decisions taking place in the financial markets. Even though it’s the fund managers and traders who are actually buying and selling securities, their choices are guided by the investment analysts providing fundamental research.
Investment analysts prepare research reports that contain all the basic and analytical information required by the investors to help them make a sound investment decision. The research reports contain the fundamental information, a view of the risk and reward metrics of different investments as well as their buy or sell recommendation.
Investment analysts are employed by investment banks such as Goldman Sachs, Morgan Stanley, etc. as well as asset management firms such as pension funds, mutual funds and hedge funds. The analysts working with investment banks are known as “Sell side” analysts. The reports produced by them are used by their bank to provide recommendation to their institutional and individual clients. On the other hand, the analysts working with asset management firms are known as “Buy side” analysts. They use these reports to manage the money of their clients.
Apart from this, there are also independent research firms who are not involved in investment banking or asset management. They only do research and provide this as a service.
Role and Career
The research analysts study the company’s financial reports, talk to the company executives, and participate in company’s events in their effort to collect information about the companies, to understand the company’s performance and future expectations. They also analyze economic factors such as interest rates, exchange rate, etc. to help them support their recommendations.
How accurate their reports are plays a key role in the long-term success of the analysts.
On the sell side, while providing correct recommendations helps, your career advancements and bonuses depend on how much business you bring in for your firm. So, it is critical that you build relationships on the buy side and get big accounts for your firm. The same goes for analysts working with independent research houses. You need to be able to get as many clients to use your reports for conducting their business.
On the buy side, the analyst’s reports are directly used by their firm to manage their portfolios. The bonus and career is linked to the performance of the assets under management.
In this industry you start your career as an intern. You will be a research assistant or a junior analyst for atleast 2-3 years. Based on your performance, you will move on to become lead analyst.
To become a successful investment analyst, you should have a solid mathematical background. You should have knowledge of accounting, financial analysis, and financial markets. You also need good communication skills (both oral and written), and have strong people skills.