Investing in Equity has been considered a raffle for ages now which is enveloped by uncertainties. There is a perception that the investing game is all about fortunes and lucks and someday if a miracle happens, you can make millions overnight and if misfortune strikes you can lose millions in a minute.
All of it is true but to a very small extent. To save an investor from the wrath of the stock market, Equity research comes into the picture. Equity research acts as a shield for the investors and protects them in the best possible ways.
What is Equity Research?
The literal meaning of Equity Research training is about your research before buying the stocks of any company. Equity research involves analyzing and studying various companies and the potential risks associated with those companies. Equity research is the first step towards your investing decision.
Companies listed on the stock exchanges are kept under the magnifying glass and the overall aspects which surround the company are carefully studied and examined. Equity research is carried out by professionals who have in-depth knowledge of the subject matter and can conclude on the basis of various results whether the stock should be bought or not. These professionals guide investors in making a purchase decision.
What are the steps involved in Equity Research?
- The economic conditions of the country where the investment has to be made are carefully studied and in-depth research has to be done. Various parameters like the Gross Domestic Product i.e. the GDP, the demand and supply factors, political conditions, etc. are taken into consideration as these factors affect the overall health of the economy and hence affect that company too where the investment is being planned.
- Various financial statements, data points, etc. are put under the scanner and are read carefully to understand the financial stability, capital structure, cash inflows and outflows, time period of dividend payments, etc. are carefully analyzed. Balance sheets are also analyzed so that a complete picture of the assets and liabilities can be ascertained. Profits and loss statements, income statements, cash flow statements are analyzed before investing in any company.
- Various performance indicators such as the revenue streams and the profitability of the business are analyzed. The history of the company where the investment has to be made is carefully analyzed. Past performances, the standing of the company with respect to its competitors, Quarterly and Annual results are carefully studied before making any investments in the company.
- The company is then valued by using various valuation models based on revenues, discounted cash flows, the sum of parts, Assets, and Liabilities, Goodwill, etc. This is done to come at a fair valuation of the company and also to understand whether the company is overvaluing or undervaluing itself at a given point in time.
- The fair prices of stocks are calculated mathematically and theoretically by using various valuation models and are then compared with the stock prices currently prevailing in the market. A deviation of a minor degree is usually ignored while computing the exactness of the share values.
- If the fair price calculated by the equity researcher turns out to be more than the prevailing equity share prices, the company in most cases have undervalued their shares by varying numbers. In such a case, the buying decision is made as the potential of the company is huge and the prices will most probably shoot up.
Investing is a game of gamble but with a systematic approach, it can be dealt with in a way that is a multiple-time better approach to make investments. With careful study and efficient equity research, one can reap the best benefits of their investments.