Equity Research with Financial Modelling
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM
Equity Research - Introduction
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 analyst’s goal is to make a recommendation on whether the shares of a
company are worth buying or selling at the current market price.
Equity research can be used for areas such
• Merger & acquisitions
• Trading activities
• IPOs & fund offerings
• Investment management
Equity Research can be:
Buy side research: In-house research for a company for its own investments, for example a
Mutual Fund.
Sell side research: Research for external entities such as customers of a brokerage house.
The activity of research can comprise of:
Front end research: Talking to the management of the companies regarding the business
plans.
Back end research: Analyzing financial statements, industry trends and other such forms of
research.
The success of equity research can be measured by ‘alpha’. Alpha is a measure of by how much
does your research better market expectation.
Alpha = Actual stock return – Expected return (based on market index)
Key Terms
ADR or American Depository Receipt: An ADR is a 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 assumes a position of market leadership.
Book Value: The value at which an asset is carried on a balance sheet.
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Equity Research with Financial Modelling
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM
Bull & Bear Markets: Bull market refers to a market that is on the rise. Bear market is a
steady drop in stock prices over a period of time.
Face Value: The nominal or stated amount assigned to a security by the issuer. It is also
known as ‘par value’, or simply ‘par’.
FIIs: Refers to Foreign Institution Investors. They invest money in financial
markets across the globe, different from the one, where they are originally incorporated.
Intrinsic Value: Refers to the value of a share based on fundamental strength and future
potential. It is also called ‘fair value’.
Market Capitalization (Cap):
It is the total market value, at the current stock exchange list price, of the total number of
equity shares issued by a company.
Free float of a company is an estimate of the proportion of shares that are freely traded in
the market.
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 country’s
economy.
Stock Classifications
Interest Rate Sensitive Stocks: Directly affected by interest rate changes, e.g. banking
sector stocks.
Commodity Pack: stocks highly dependent on global commodity prices and the state of the
global economy.
Policy Driven Stocks: stocks whose prices get affected by change in government policy, e.g.
oil companies.
Stocks Driven by Domestic Demand: Stocks of businesses whose demand comes domestic
consumers, hence largely unaffected by global events.
Stocks Vulnerable to External Economies: These are dependent on global demand, e.g. IT
and BPO sector stocks.
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Equity Research with Financial Modelling
A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM
FII Favorites: 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.
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