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EQUITY RESEARCH

A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM

Equity Research - Introduction


Equity refers to ownership. Stock, or shares, refer to equity in a business. Equity research involves: Qualitative Analysis: analysis of the economy and the industry the business is in and Quantitative Analysis: analysis of the financial information of the company.

An Equity Research analysts goal is to make a recommendation on whether the shares of a company are worth buying or selling at the current market price. Different brokerage/investment companies use different terminologies to make their recommendations. Common terminologies are: Buy/Sell/Hold Overweight/Underweight

Equity Research can be: 1. Buy side research: In-house research for a company for its own investments, for example a Mutual Fund. Such research can be more neutral or un biased, as the recommendations are for in-house use. The more correct such recommendations are, the better the company performs. 2. Sell side research: Research for external entities such as customers of a brokerage house. Such research may be biased, as buy recommendations can result in more business for the brokerage. However, if such biased recommendations happen on an ongoing basis, the business will lose customers. Sell side recommendations are usually called blanket recommendations, as sell side analysts provide these reports to all their clients. The activity of research can comprise of : Front end research: Talking to the business being analysed. Back end research: Analysing various financial and industry information.

The success of equity research can be measured by alpha. Alpha is a measure of by how much does your research better market expectations. Alpha = Actual stock return Expected return (based on market index)

Finitiatives Learning India Pvt. Ltd. (FLIP), 2010. Proprietary content. Please do not misuse!

EQUITY RESEARCH
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM

Key Terms
ADR or American Depository Receipt: An ADR is a tradeable or negotiable certificate issued by an American bank. It represents a certain number of shares of a foreign company, which have been deposited with the American bank. Bellwether Stock: This is a stock which can lead the market a rise or fall in such a stock often leads a rise/fall in the overall sector or market. Book Value: The value at which an asset is carried on a balance sheet. Since the asset is subject to depreciation, the book value reduces every year. Bull & Bear Markets: Rising (think of a bulls horns!) and falling markets, respectively. Face Value (of a share): The nominal or stated amount (in INR, in India) assigned to a security by the issuer. Also known as par value, or simply par. Does not have much significance for a share. FIIs: Refers to Foreign Institution Investors, or companies incorporated in a country different from where they are investing. Intrinsic Value: Refers to the value of a share based on fundamental strength and future potential. Also called fair value. If, Market price is less than Intrinsic Value: share is said to be undervalued. Market price is more than Intrinsic Value: share is said to be overvalued. Market price is equal to Intrinsic Value: share is said to be fully valued. Market Capitalisation (Cap): Market Price per share * Number of Outstanding Shares of the Company. Market Capitalization (using free float) = Market Price * Number of Outstanding Shares of the Company * Free Float Factor Overheated Market: Demand-Supply mismatch, where too much money is chasing too few shares, leading to sharp price rises. Smart Money: Investments by informed or knowledgeable investors. Sunrise Industries: Growth areas which are going to play an important role in a countrys economy.

Stock Classifications
a. Basis Market Cap: Small Cap, Mid Cap and Large Cap stocks.

Finitiatives Learning India Pvt. Ltd. (FLIP), 2010. Proprietary content. Please do not misuse!

EQUITY RESEARCH
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM b. Interest Rate Sensitive Stocks: Directly affected by interest rate changes, e.g. banking sector stocks. c. Commodity Pack: stocks highly dependent on global commodity prices.

d. Policy Driven Stocks: stocks whose prices get affected by change in government policy, e.g. oil companies. e. Stocks Driven by Domestic Demand: Stocks of businesses whose demand comes domestic consumers, hence largely unaffected by global events. f. Stocks Vulnerable to External Economies: These are the opposite of the earlier category, that is dependent on global demand, e.g. IT and BPO sector stocks.

g. FII Favourites: These are stocks that are preferred by Foreign Institutional Investors (FIIs) and move in tandem with their operations; mainly the index and large cap stocks.

Finitiatives Learning India Pvt. Ltd. (FLIP), 2010. Proprietary content. Please do not misuse!