Equity Research Vs Credit Research Know The Difference

Equity Research vs Credit Research

If you are keen on making a career as a Financial Analyst, two areas stand out within finance – Equity Research and Credit Research. Equity Research deals with stocks and stock markets, while Credit Research looks at Credit and Bond Markets.

In this in-depth article, we compare and contrast the key differences between the two career choices – Equity Research and Credit Research.

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#1 – Equity Research vs. Credit Research – Conceptual difference

We want to start by helping you understand the conceptual difference between the two.

Equity Research

Equity research is about finding the valuation of a company, mind you, which is a listed company on theStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more.Once you decide on a company, you look at its economic aspects and stability and growth, which can be GDP, its rate of growth, its competition, and its size in the market or the industry.Once the economics is understood, you get into its financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or balance sheet from its historical performance.Now make the comparison of its past performance with its current performance (financial statement analysis)Based on the management result on the historical performance and the industrial competition.Using the equity calculation financial models, the company’s fair price is calculated.The equity researcher plays a vital role in filling the information gap between the buyers and the sellers.The main job of an equity researcher is to spend a lot of time and energy researching these stocks.

Summarizing the equity research, we can say that it researches the stocks or the shares price of a registered company.

Credit Research

However, credit research is more about bonds and interest rates. It is much more technical and complex in comparison with equity research. Credit is also categorized under the fixed income of the company.

Credit research is based on five fundamentals starting with the rivalry within the industry. You can also call it a competition between the companies of the industry; the second fundamental is the bargaining power of the customer and then comes the bargaining power of the suppliers, then we have the threat ofAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility.read more the substitute productsThe Substitute ProductsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility.read more, and finally, we have the threat of new product launches or new entries.The analysis of the issuer is the next job of a credit researcher. When you study the issuer’s credit analysisCredit AnalysisCredit analysis is the process of drawing conclusions about an entity’s creditworthiness based on available data (both quantitative and qualitative) and making recommendations about perceived needs and risks. Credit analysis also involves identifying, assessing, and mitigating risks associated with an entity’s failure to meet financial commitments.read more, you include the study of the issuer’s financial statement. Here the financial flexibility and liquidity are crucial because bonds and debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more are the most liquid products for investors. The critical factors of study and analysis include a rating of the company, the net debt of the company, earnings of the company before interest, taxes, depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
read more, and amortization for the last 12 months or one year. You can also call it EBITDA, EBITDA interest coverage, net debt on EBITDA, Funds from the operations upon net debt, debt upon capital, and finally, a five-year credit default swapCredit Default SwapA Credit Default Swap (CDS) is a financial agreement between the CDS seller and buyer. The CDS seller agrees to compensate the buyer in case the payment defaults. In return, the CDS buyer makes periodic payments to the CDS seller till maturity.read more or CDS. However, the considerations differ from the industry.After considering fundamentals and doing the issuer’s analysis, it is also vital to do their security analysisSecurity AnalysisSecurity analysis is the process of interpreting the value of financial instruments such as stocks, bonds, debts, warrants, and other securities of a company to ensure that the investors are investing through publicly available information. The three related methods include fundamental, technical, and quantitative approaches.read more. The next consideration is analyzing the views of specific issues, for example, bonds or loans. Examining the capital structure and the process of capital structuring is crucial for it will help you understand the position of the company in the resilience stage, then a shock stage, and finally, the recovery stage. In the current market, the level of bank debts has increased in comparison to unsecured debts therefore during the time of deep recession the credit analyst expects a lesser recovery rate in the downturn. Hence you need to understand the problems arising from the bond’s documentation.Any credit research is to add value in various ways to different sectors and different security selections to avoid black holes and defaults and high-value generation. The researchers use the traffic light system to recommend investing in the bond documentation. For example, a green light is given to issuers whose operations are considered to be least at risk for investors. In contrast, yellow light is given to issuers whose bonds are comparatively a little riskier than the green issuers. In contrast, the red light issuer is the riskiest in the market for investing.

To summarize credit research, we can say its analysis revolves around the documentation of the issuer’s bonds.

#2 – Equity Research vs. Credit Research – Career Pre-requisites

We can give you an idea about what you require to become one of these professionals.

Equity research

To start with, educational qualification is essential. To become an equity researcher, you first need to have a bachelor’s degree in finance, economics, or other related fields. MBA and CFA CFAThe Chartered Financial Analyst (CFA®) Program offers a graduate-level curriculum and examination program designed to expand your working knowledge and practical skills related to investment decision-making. read more have added qualifications.You require very strong analytical skills understanding of relevant finance – valuations, DCF, Financial Modeling, Report Writing, mathematics, and accounting techniques.You need to be very good with a verbal and written communication that will help you communicate ideas fluently and effectively because you need to interact clearly with your clients.It would be best if you were good with Microsoft Excel, PowerPoint presentations, and you must have experience in handling Bloomberg plus.Some basic criteria are good time management skills, clear priority understanding, and being able to handle multiple projects simultaneously.

Candidates interested in this profile should have a certain set of interests and educational backgrounds. We have listed some of the prerequisites required in a candidate for the captioned profile below.

It would be best if you had a bachelor’s degree in finance, economics, or other related fields. Degrees such as CA, ICWA, CMACMACMA is a certificate course offered by the IMA. Here are a few exam tips: 1) Don’t panic if you don’t know the answer 2) Don’t get distracted during the multiple-choice section. 3) Keep track of the time and increase your speed.read more, MBA, and other postgraduate degrees in finance are an added benefit to this course.It would be best if you were interested in performing credit appraisals and practicing the course’s best practices.Interest in generating better trade ideas and identifying the problem loans in the financial statements of the issuers should interest you as a credit researcher.You must be interested in building and maintaining various credit risk models.You should be able to and be interested in amplifying and monitoring credit systems.One of your most important roles will be analyzing and studying the issuer’s debt and loan portfolio performance.It would be best to streamlineQuantitative Research refers to the systematic investigation in which a person collects the data from the different respondents based on numerical figures. Data obtained is then analyzed to get the results using various mathematical, statistical, and computational tools.read more quantitative researchQuantitative ResearchQuantitative Research refers to the systematic investigation in which a person collects the data from the different respondents based on numerical figures. Data obtained is then analyzed to get the results using various mathematical, statistical, and computational tools.read more for the rate of interest or ROI.You will have to enhance the Basel-based rating system that will be only internal.Of course, if you are a credit analyst, you will have recommendations related to lending and investment-based.Finally, you will have to design credit strategies and credit portfolios.

#3 – Equity Research vs. Credit Research – Employment Outlook

As the market has been growing, so has the scope of employment; hence the market, in general, is expecting massive growth in the demand for equity researchers. Some of the biggest employers for equity researchers are JP Morgan, Morgan Stanley, Credit Suisse, Citi, Barclays, HSBC, etc. To mitigate risk, the use of quantitative models of strategies is becoming very important. Mostly, companies have been focusing on quantitative data over qualitative data asFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more has become essential to solving problems.

The requirement for the position of credit analystRequirement For The Position Of Credit AnalystThe top essential questions in a credit analyst interview are - what is credit analyst, explain the process of credit analysis, what are the 5Cs of credit analysis, what do you mean by interest coverage ratio, how to value a company, what do credit rating agencies do.read more position has been significantly less and has been decreasing since the year 2004. The dip has been more than 6% globally, with an average dip of 1.1% annually. However, with the improving market, the demand for the captioned profile is expected to increase. The market is expecting more than 21,000 openings for the designation of credit analysts. It means new positions for the job role of credit analystsJob Role Of Credit AnalystsCredit analysts work in a variety of areas, including consumer credit, business credit, financial institutions, sovereign/municipal credit, and credit investment.read more will increase by 4.4% annually by the year 2018. Companies hiring credit analysts are Deutsche Bank, Barclays Standard Chartered Bank, HSBC, CITI, etc.

#4 – Equity Research vs. Credit Research – Salary

Let us give you an idea of what you should expect from the career you choose.

As an equity researcher, you can earn

A junior analyst that is the start of your career, you will start not less than between $45000 to $50000 annually as your base salary. Compensations and allowances change with the companies.

Associate: as you grow in your experience, your wages increase with your experience. You may draw anywhere close to $65000 to $90000 annually, along with about 50 to 100% bonus.

As a senior analyst, your salary per your annual package may increase to a basic compensation of $125000 to $250000, including a bonus anywhere close to 2 to 5 times your basic salary.

With this course and only a bachelor’s degree, you can start your career with a handsome average package of $67000 annually.

#5 – Career Pros & Cons

Pros

The start package and the future package seem very good and healthy.Various career options are open for an equity researcher, for he can either work as an employee or as a professional.Has in an out idea of the market

Cons

Spends his life that is all his time and energy in stock research.His job includes a lot of responsibility as a little calculation mismatch can cost the companies and his investors a lot, resulting in his career loss.
Great job growth and opportunities are expected in the coming 5 to 6 years.Great salary package to start with and also massive companies to hire.Different job opportunities to choose from, along with the option of industries.
Might have a very hectic job profile with spending more than 40 hrs a week at work.Again a very risky job or a job with very high responsibility for calculations must be accurate.

#6 – Equity Research vs. Credit Research – Work-life balance

Very hectic job!!! An equity researcher starts his day at 7.00 am, that is before the market starts at 9.00, starting with morning meetings right up to following the market, from the client request, discussion to the closure of the market, and even after the market closes, working on the research pieces for publications. An equity researcher finishes his job from 7.30 to 8.00 in the evening, spending more than 12 hours at work. The job here is quite tough and demanding.

Also, checkout Investment Banking LifestyleInvestment Banking LifestyleLong working hours, weekend work, a lot of hard work, and little sleep are all part of an investment banker’s life. Life as an investment banker is described as hectic, but for those who want to live a life of dedication, competition, and risk while also performing well, investment banking is the appropriate choice.read more just for comparison.

However, a credit researcher’s job does not work following the market; hence he need not report working that early in the morning. Yet his job is not that easy as he needs to research the data and financial status of companies or issuers of bonds. His research work does require a lot of time. Even a credit researcher spends more than 40 hours a week at his workplace.

Both the jobs are equally demanding as they involve substantial financial risks, for a little calculation mistake can cost them a lot of financial loss and their careers.

What to Choose?

The job of an analyst sounds like a dream job for candidates passionate about money and the market. However, it isn’t an easy job to do. If you are willing to spend most of your life working surrounded by many challenges, you must consider this as your career. It provides you amazing growth both career and money-wise; it also provides you excellent exit opportunities.

If you are ready to do a stressful job and play with facts and figures of companies, make decisions, predict interest rates, and give recommendations, then this is your job. Remember that this job is not an easy job or a job that can be taken casually. It is a demanding job that needs a lot of both hard and smart work.

Equity Research Vs Credit Research Know The Difference