Financial analysts can work in a variety of industries. A large proportion of them are employed by
mutual- and
pension funds,
hedge funds, securities firms, banks,
investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions. Financial analysts invariably use
spreadsheets (and
statistical software packages) to analyze financial data, spot trends, and develop forecasts. The analyst often also meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Analysts specializing in advanced
mathematical modeling and programming are referred to as "quants"; see for an overview, and for the various roles.
Securities firms In a stock
brokerage house or investment bank, the Investment Analyst will Analysts also specialize in fixed income. Similar to equity analysts,
fixed income analysts assess the value and
analyze the risks of various securities, here focusing on
interest rate- and
fixed income securities, particularly
bonds. They may further specialize, but here by issuer-type: i.e.
municipal bonds,
government bonds, and
corporate bonds; the latter specialization is often decomposed into
convertible bonds,
high-yield bonds, and
distressed bonds; some cover
syndicated loans. The reporting focuses on the ability of the issuer to make payments—similar to the credit analysis
described below—but also on the
relative value of the security in question, and in context of the overall market and
yield curve. See
Fixed income analysis. Analysts are generally divided into
'sell-side' and
'buy-side'. The buy-side is sometimes considered more prestigious, professional, and scholarly, while the sell-side may be higher-paid and more like a
sales and marketing role. It is common to begin careers on the sell-side at large banks then move to the buy-side at a fund. • A sell-side analyst's work is not used by its employer to invest directly, rather it is sold either for money or for other benefits by the employer to buy-side organizations. Sell-side research is often used as 'soft money' rather than sold directly, for example provided to preferred clients in return for business. Writing reports or notes expressing opinions is always a part of "sell-side" (brokerage) analyst job and is often not required for "buy-side" (investment firms) analysts. It is sometimes used to promote the companies being researched when the sell-side has some other interest in them, as a form of marketing, which can lead to
conflicts of interest. • A buy-side analyst, such as a
fund manager, works for a company which buys and holds stocks itself, on the analyst's recommendation. As they gain experience, analysts often move from buy-side research, concerning individual securities and sectors, into
portfolio management itself, selecting the
mix of investments for a
company's portfolio. They may also become fund managers and manage large investment portfolios for
individual investors. Typically, analysts use
financial statements analysis, including accounting analysis and
ratio analysis, but also consider overall economic situation and specific factors including interest rates, employment, production, management and tactical evaluation of the market environment. Analysts obtain information by studying public records and
filings by the company, as well as by participating in public
earnings calls where they can ask direct questions to the management. Additional information can be also received in small group or one-on-one meetings with senior members of management teams. However, in many markets such information gathering became difficult and potentially illegal due to legislative changes brought upon by corporate
scandals in the early 2000s. One example is
Regulation FD (Fair Disclosure) in the United States. Many other developed countries also adopted similar rules. Analyst performance is ranked by a range of services such as StarMine owned by
Thomson Reuters or Institutional Investor magazine. Research by
Numis found that small companies with the most analyst coverage outperformed peers by 2.5% — while those with low coverage underperformed by 0.7%. See
Neglected firm effect.
Investment Banking Financial analysts in the
investment banking departments of securities or banking firms often work in teams, analyzing the future prospects of companies, and selling shares to the public for the first time via an
initial public offering (IPO), or
issuing bonds; this task is often identical to that of a securities analyst. On this basis, they will then make presentations to prospective investors re the merits of investing in the new company, presenting their "
pitch books" on a "
roadshow"; see
bookrunner and
securities underwriting. An additional component of the IB role here: analysts ensure that all forms and written materials necessary for compliance with
Securities and Exchange Commission regulations are accurate and complete. Many IB analysts work in
mergers and acquisitions (M&A) departments, similarly preparing analyses on the costs and benefits of a proposed merger or takeover, and assisting with
regulatory submissions; here there are both buy-side- and sell-side analysts. See . The analysis is somewhat more specialized than for an IPO, as it must consider
valuation pre- and post-merger, a function of efficiencies, synergies, or increased market share,
financing employed, including M&A specific considerations such as the
swap ratio, and
tax optimization, both re the transaction and for the new entity. At more senior levels, (and liaising with
sales and trading). Investment banks, and large trading houses, often employ an
economics team or group, led by a
chief economist. This team produces the
economic forecasts informing the various valuations and overall
investment strategy; see and
Economic analyst.
Middle office Within banking, there are other non-quant analyst roles (not necessarily titled "financial analyst"), mainly within the
"middle office"; these are generally linked, at least
by dotted line, to both the Finance and Risk Management areas. •
Corporate Treasury is responsible for an investment bank's funding, capital structure management, and
liquidity risk monitoring; see . It is then (co)responsible for the bank's
funds transfer pricing (FTP) framework, allowing for comparable financial performance evaluation among business units •
Product Control is primarily responsible for
"explaining" the P&L; i.e.: attributing returns to individual bank treasury desks on a daily basis,
decomposing these into their
risk factors, and ensuring that traders' positions
are reflected at
their market values; the tools here are often built by a separate quant team, possibly
front office, but maintained by Product Control. • Credit Risk monitors the bank's debt-clients on an ongoing basis, as
described below; it is additionally responsible for tracking the
risk capital and
risk adjusted returns on these clients, and reporting
re concentration risk and
risk appetite. These areas, together with the various dedicated
Risk Groups, allow the Finance department to advise senior management regarding the firm's global risk exposure and the profitability and structure of the firm's various businesses; see . A
comptroller (or financial controller) is a senior position, responsible for these analyses and
internal control more generally, usually reporting to the bank's
chief financial officer, as well as copying the
chief risk officer.
Corporate and other As outlined, the job title is a broad one, and analyst-roles also include
financial management and (credit) risk management.
Financial planning and analysis Financial analysts within corporates provide inputs into all elements of the firm's financial management. • The short term focus is on
working capital management, and includes tasks such as
profitability analysis, cost analysis,
variance analysis, and
cash flow forecasting (often overlapping
treasury management). • Medium term elements are
budgeting and planning; their models here form the basis for
financial forecasting,
scenario analysis (sometimes re corporate strategy), and
balance sheet optimization. The latter, extends to involvement with
dividend policy, and
capital structure; relatedly, forecasts here also feed into group
ALM. • Analysts are also involved with long term "
capital budgeting", i.e. decisions relating to
"project" selection and valuation and related funding considerations; these forecasts feed through to the
debt capital markets team, "DCM", responsible for securing and managing long-term funding. •
Risk analytics will span all perspectives. Similar to treasury though, the team may reside in a
separate unit; see
Three lines of defence. Management of these deliverables sits with the
financial manager (FM); while
budget analyst,
cost analyst,
treasury analyst /
manager,
risk analyst /
manager and
corporate finance analyst are often specialized roles. The area overall is sometimes referred to as "
FP&A" (Financial Planning and Analysis). The
financial director or
chief financial officer (FD, CFO) has primary responsibility for managing the company's finances, including financial planning, management of financial risks, record keeping, and financial reporting.
Credit analysts There are several analyst roles related to
credit risk, macro or micro.
Ratings analysts (who are often employees of
ratings agencies), evaluate the ability of companies or governments that issue
bonds to repay their debt. On the basis of their evaluation, a management team
assigns a rating to a
company's or
government's bonds. Financial analysts employed in
commercial lending perform balance sheet analysis, examining the borrower's
audited financial statements and corollary data in order to similarly assess lending risks, and to confirm that
yield is appropriate given risk; this task is both upfront and on a monitoring basis thereafter. The focus is on current and forecasted
debt- and
liquidity ratios generally, and specifically those related to any
loan covenants, such as
debt service coverage ratio (DSCR) and
loan-to-value ratio (LTVR). In
retail banking,
credit analysts build models to determine an applicant's creditworthiness, assign an initial
credit score, and monitor this and the loan on the basis of an ongoing
"behavioral" score. In this and the previous role,
impairment- and
provision-modelling are a prominent deliverable (see
IFRS 9); the
probability of default (PD),
exposure at default (EAD) and
loss given default (LGD) statistics or models are (often) provided by a separate (but dedicated)
credit-quant team.
Accounting analysts Some financial analysts specialize as
accounting analysts; they will collect industry data (mainly balance sheet, income statement and capital adequacy in banking sector), merger and acquisition history and financial news for their clients. They then typically "standardize" the different companies' data, facilitating
peer group analysis: the main objective here is to enable their clients to make better decisions about the investment across different regions. They also provide the abundance of
financial ratios calculated from the data gathered from financial statements, and possibly other sources. ==Qualification==