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What Is A Financial Analyst?

Understanding financial analysts, the various types, what they do, and their future prospects

What Is A Financial Analyst?

Defining a financial analyst

Financial analysts analyze financial data and utilize the results to assist businesses in making choices. Frequently, their study is intended to assist businesses in making investment decisions.

Financial analysts primarily do research on macroeconomic, microeconomic, and firm basic factors in order to create predictions about companies, markets, and industries. On the basis of a company's overall performance and future prospects, they frequently suggest a course of action, such as buying or selling its stock.

An analyst must be knowledgeable about recent advancements in their area of expertise as well as the creation of financial models to forecast future economic circumstances for a variety of factors.

Not all financial analysts perform research on the bond or stock markets or aid in the investment decisions of their employers. Additionally, businesses may employ an analyst to evaluate the effectiveness of various marketing strategies in relation to costs using numerical data. Financial analysts who are in charge of monitoring certain franchises or clusters of franchises within a geographical area are frequently employed by businesses that use the franchise model. The analysts identify the company's strengths and shortcomings and forecast profit and loss.

What do they do?

The main task of financial analysts is to develop financial models that can forecast the results of particular business choices. They need to gather a lot of financial data and take into account things like financial market trends and similar historical transactions in order to do this successfully. Because an analyst's duty might vary greatly based on where they work. To elaborate, financial analysts are accountable for the following tasks:

Gather data and information

A financial analyst's job begins with acquiring data and information regarding the subject of their analysis. Examples include general ledger accounting data, stock price data, historical financial reports, statistics, macroeconomic data, market research, and just about any other type of quantitative data. The company's internal databases, third-party service providers like Bloomberg or Capital IQ, and governmental organizations like the Securities and Exchange Commission are some of the sources from which the information will be gathered (SEC).

Organize information

The data is often entered into Excel or another kind of database once it has been gathered. Once data has been entered, the following step is to organize, clean up, and convert it into a comprehensible format. This often entails categorizing or classifying the data, adding formulas and functions to ensure that it is dynamic, and utilizing standard formatting techniques to make it simple to read and comprehend. View additional formatting hints for Excel.

Analyze financial results

The financial analyst can now begin studying previous data and results after the data has been cleaned up and structured in Excel. This often entails taking a look at indicators and ratios including the debt/equity ratio, the earnings per share (EPS), the gross margin, net margin, fixed vs. variable costs, year-over-year (YoY) growth rates, return on equity (ROE), return on assets (ROA), and many others. The analyst will search for patterns and compare the performance to other businesses in the same sector. This is one of the main aspects of a financial analyst's job description.

Make forecasts and projections

It's time to generate ideas and forecasts about how the company will perform in the future now that past data has been analyzed. Predicting how a firm will perform requires both art and science, as well as numerous assumptions and even leaps of faith. Regression analysis, year-over-year growth rates, as well as bottom-up and top-down methodologies, are frequently used in forecasting. The CFI's Budgeting and Forecasting Course has more information.

Develop suggestions

In addition to being skilled with numbers, a smart financial analyst also comes up with ideas and suggestions for how to enhance a company's operations. There are many different types of suggestions and insights that can be useful, such as strategies to improve customer happiness, operational efficiencies, the potential for revenue growth, and many others. This is what really sets apart a top-tier financial analyst from the competition. The CEO, CFO, other executives, and/or the board of directors will be informed of these suggestions.

Construct Excel models

Financial modeling will play a significant role in the work of analysts in investment banking, equities research, corporate development, financial planning & analysis (FP&A), and other fields of corporate finance. The three financial accounts are often connected first in these models, and then more complex financial models like discounted cash flow analysis (DCF) models, internal planning models, and obscure models like LBO models and M&A models are added on top.

Present yourself

A financial analyst's job description will usually mention presenting presentations when someone asks what they do (often in PowerPoint). The finished study in Excel must then be converted into charts and graphs so that they may be added to pitchbooks and management presentations. The PowerPoint Presentations Course at CFI has more information.

Produce reports

A typical day for an analyst includes working with internal reports and dashboards. The information must be presented in a clear, timely, understandable, accurate, and insightful manner whether it is measuring actual results versus budgeted results or reporting key performance indicators (KPIs). Check out the Dashboards Course at CFI to find out more.

The types of financial analysts

Financial analysis is a vast field with many different job titles and career options. The three main types of analysts in the financial/investment sector are those who work for:

  • Buy-side firms (investment houses that manage their own funds)
  • Sell-side firms
  • Investment banks

Additionally, financial analysts may work with neighborhood and regional banks, insurance providers, brokerages for real estate investments, and other data-driven businesses. Any company that routinely makes important decisions about how to spend money could benefit from the services of a financial analyst.

Sell-Side analysts

If you've ever watched a financial news show, "analysts" have definitely come up in the reporting. These analysts, who often work on the sell side, are said to offer a fair assessment based on their own investigation into the securities of a firm.

Simply put, a sell-side research analyst's role is to monitor a list of businesses, often all of which are in the same industry, and to offer frequent research reports to the clients of the firm. In the course of that process, the analyst would often create financial projection models for the firms and interview customers, suppliers, rivals, and other industry experts.

The final product of the analyst's work, as seen by the general public, consists of a research report, a set of financial projections, a price target, and a recommendation for the projected performance of the company. A single expectation known as the consensus estimate can be created by averaging the estimates produced from the models of many sell-side analysts.

Buying versus selling analysts

In the near term, stocks may change in response to an analyst upgrade or downgrade or in response to whether they meet or fall short of expectations during the earnings season. Typically, if a company beats the consensus estimate, its stock price will increase; if it fails the prediction, the opposite happens. This isn't always the case, though.

Sell-side analysts occasionally fail to update their estimates, although their expectations do shift. A "whisper number," which is an estimate that differs from the consensus estimate, will occasionally be mentioned in financial news. This unwritten, whispered expectation becomes the most recent one.

An analyst often gives a firm a rating of "buy," "sell," or "hold" when they "initiate" coverage of the company. This rating serves as a signal to the financial world, showing how the analyst expects the stock price to change over a specific period of time. Sometimes the rating will represent predicted stock movement rather than how the analyst expects the firm to perform.

In reality, a sell-side analyst's primary responsibility is to persuade institutional clients to route their trading through the analyst's firm's trading desk. This position is heavily reliant on marketing. The analyst must be regarded by the buy-side as offering beneficial services in order to garner trading revenue. Information is obviously valuable, and some analysts are always looking for fresh data or exclusive perspectives on the market. There is a great deal of pressure to be the first to the client with new and distinct information because nobody cares about the third iteration of the same story.

Of course, there are other ways to stand out with customers. Individual meetings with corporate management are valued by institutional investors, and analysts who set up these meetings will receive compensation. On a very cynical level, a sell-side analyst's job occasionally resembles that of an expensive travel agency.

The fact that firms frequently deny access to management to analysts who do not follow their lead complicates matters and puts analysts in the awkward position of having to provide the Street with helpful information and opinions while still keeping good connections with the company's management. If an analyst makes a bad suggestion, the investment banking portion of the business may lose that client. Investment banking is a significant source of profit for banks.

As it stands to reason that a deeper grasp of a market or product will enable distinct calls, analysts also aim to build expert networks they can rely on for a steady stream of information.

Prudent investors might not always believe that an analyst's written word represents their true sentiment for a firm because a lot of this material is digested and analyzed—it never truly reaches the public page. The real truth is said to emerge in the private discussions with the buy-side, which take up the majority of an analyst's day.

Buy-Side analysts

Unlike a sell-side analyst, a buy-side analyst's work is considerably more about being correct; helping the fund with high-alpha ideas and avoiding costly errors is essential. In actuality, avoiding the negative is frequently a crucial aspect of the job of the buy-side analyst, and many analysts approach their work with the goal of identifying potential pitfalls in an idea.

The tasks don't seem all that different on a daily basis. In order to provide the best stock recommendations, buy-side analysts will research information, develop models, read the news (albeit more of it comes from sell-side analysts than a sell-side analyst would), read the news, and more so than a sell-side analyst would.

Although buy-side analysts typically have greater coverage obligations than sell-side analysts, this will vary depending on the size of the institution. While most sell-side firms would have numerous analysts covering certain industries within those sectors, it is customary for funds to have analysts covering the technology sector or the industrial sector (like software, semiconductors, etc.).

Many buy-side analysts spend their time trying to sort out the most helpful buy-side analysts, whilst many sell-side analysts strive to spend much of their time locating the greatest sources of information on their sector. The fact that a buy-side analyst would benefit greatly from compiling a list of the industry's leading analysts does not imply that many of them do not do their own unique research—the best ones always do.

Although buy-side companies rarely directly fund or acquire sell-side research, they frequently bear some of the cost of a sell-side analyst's salary. The sell-side firm typically receives soft cash from the buy-side firm as a deceptive way to pay for the study. Soft dollars are additional fees that are paid when trades are executed by sell-side firms.

In essence, the research conducted by the sell-side analysts influences the buy-side company to execute trades through their trading department, resulting in revenue for the sell-side company. Additionally, a crucial element of sell-side analyst remuneration frequently involves buy-side analysts having some influence over how trades are managed by their firm.

Buy-side vs. Sell-side

Despite the fact that both sell-side and buy-side analysts are responsible for monitoring and evaluating companies, there are significant differences between the two positions.

In terms of pay, sell-side analysts frequently earn more, although there is a broad range, and buy-side analysts in successful firms (especially hedge funds) can perform far better. Although sell-side analysts regularly travel and put in longer hours, buy-side analysts may have more pressure on their shoulders due to the nature of their employment.

There are considerable disparities between what these analysts are really paid to do, contrary to what the job descriptions may imply. Realistically speaking, sell-side analysts are compensated mostly for access to management and information flow. The effectiveness of the analyst's recommendations and the overall performance of the fund is significantly more important determinants of buy-side analyst compensation (s).

The importance of precision in the two vocations also varies. Contrary to what many investors believe, sound financial projections and models are more important for buy-side analysts than sell-side analysts. Similar to how certain financial media might imply, price targets and buy/sell/hold calls are not nearly as significant to sell-side analysts. In fact, as long as they offer meaningful information, analysts can perform well even if their stock predictions or models are below average.

On the other hand, a buy-side analyst typically cannot afford to be incorrect frequently, or at least not to the point where it materially deviates from the relative performance of the fund.

Similar to how buy-side analysts often enjoy less restrictive regulations on share ownership, disclosures, and outside work, at least as far as regulators are concerned, sell-side analysts and buy-side analysts are subject to distinct norms and standards (individual employers have different rules concerning these practices).

Certifications for financial analysts

If you aren't pursuing an MBA or majoring in economics in college, you might want to think about preparing for the Series 7 and Series 63 tests or joining the Chartered Financial Analyst (CFA®) Program. Remember that you will need sponsorship from a FINRA member firm or regulatory body to take the Series 7 test.

In order to avoid redundant testing of knowledge when taking examinations to register in different categories and to make it simpler to enter the securities business, FINRA introduced a new exam in October 2018 called the Securities Industry Essentials (SIE) exam.

The Series 7 and Series 63 tests are additional means to show a fundamental understanding of investing vocabulary and accounting procedures while the CFA exam is more technical. Start with the SIE and work your way up to the CFA exam if you find a sample CFA exam to be overwhelming, or start interviewing for junior analyst employment after completing the SIE. Many organizations also provide training courses for applicants with promise in the profession.

Salary for financial analysts

In the banking industry, financial analysts typically earn much less than other occupations, especially in New York City. The median annual income for a full-time wage or salary worker in the United States as a whole is considerably lower than the typical annual income for an entry-level financial analyst. The average weekly wage for any full-time wage or salary worker in the U.S. in 2021 was $1,010, according to the U.S. Bureau of Labor Statistics (BLS). This amounts to a yearly salary of about $52,520 for a 40-hour work week.

Contrast that with the $81,410 median annual wage (or $39.14 per hour) for financial analysts across all experience levels in 2021.

4 Financial analysts so typically start out much higher compensated than the average worker. Additionally, even in their first year, financial analysts at major Wall Street firms frequently earn far more.

Jobs for financial analysts

The future of employment for financial analysts seems promising. Although it's a competitive sector, there were over 492,100 positions in it overall in 2020, according to the most recent BLS numbers, and the profession is expected to rise by nearly 6% between 2020 and 2030.

Financial analysts must continue to be careful in acquiring data on the macroeconomic level as well as data on particular companies, particularly in evaluating such companies' financial fundamentals via their balance sheets. Analysts must read extensively on their own time in order to stay current on financial news. The Wall Street Journal, The Financial Times, The Economist, and financial websites are among the periodicals that analysts frequently read.

Additionally, traveling extensively is a common aspect of being an analyst. Some analysts go on-site visits to businesses to observe activities firsthand. Analysts usually go to conferences with other professionals in their fields of expertise.

In the workplace, analysts develop their skills using relational databases, spreadsheets, and statistical and graphical software. They employ these technologies to create financial reports that contain forecasting, cost-benefit analysis, and trend analysis, as well as suggestions for top management. Analysts must also evaluate documents for conformity with legal requirements and understand financial activities.

Benefits of being a financial analyst

Although there are certain difficulties in the job of a financial analyst, there are also many opportunities, especially in terms of choosing which industry you want to work in. This is due to the fact that financial analysts are crucial to practically every sector of industry, so whether you have a passion for music or are interested in technology, you're sure to find a job that's a good fit for you. You'll be playing a critical role in compiling the data necessary to make these judgments and to establish new strategies, in addition to having freedom when it comes to industries.

Being an analyst will give you the chance to develop a strong professional network, an asset you can continue to maintain throughout your career, in addition to acquiring new skills like how to create models in Excel and taking part in intriguing business processes.

Risks of being a financial analyst

Being able to assess and comprehend financial statements, market trends, and microeconomic situations in order to provide recommendations on future business agreements and decisions is one of the challenges of working as an analyst in the finance industry, which is largely data-driven. One of the difficulties analysts encounter, in addition to the technical difficulties involved in compiling and analyzing this complicated data, is the quick speed of the financial sector. Fortunately, these difficulties can be solved by being prepared and receiving the appropriate training.


Is financial analysis currently in demand?

Financial analysis expertise will be more in demand than ever as of June 2022 among both financial and non-financial professionals. The US Bureau of Labor Statistics projects that by 2030, there will be more than 31,000 new jobs for financial analysts, a six percent rise from current levels.

What are the tools of financial analysis?

Vertical analysis, horizontal analysis, and ratios analysis are the three main instruments for financial statement studies.

How is financial analysis useful in projects?

A project's profitability or cost-effectiveness in comparison to other projects or investments is the main goal of a financial study of the project. The outcomes of the financial analysis are frequently compared to other initiatives to determine which ones should be carried out.

What is the best financial indicator?

The best single predictor of a company's financial health and long-term viability is its bottom line profit margin.

How can you improve financial ratios?

A corporation can raise its liquidity ratios by paying off debt, utilizing long-term financing, managing receivables and payables effectively, and reducing certain expenses.