Emerging Trends in Equity Research

Investing in equity research is valuable because it fills information gaps, so investors don't have to analyze each stock individually.

FREMONT, CA: A lack of information results in inefficiencies that lead to overvalued or undervalued stock misrepresentations. An important benefit of research is that it fills in information gaps so that the investor does not have to analyze every stock individually. The division of labor makes the market more efficient.

Institutional investors fund equity research on a fee basis or with soft dollars. Reporting has begun to change depending on whether the market is bullish or bearish.

Research in Bull and Bear Markets: Each bull market has its excesses that distort the normal functioning of the market. Whether it's dotcoms or organic foods, every age has its mania that distorts the normal functioning of the market. When investors rush to make money, rationality takes a beating. It is the market's swings that influence research. In a bull market, analysts are pushed by investment bankers, the media, and investors to concentrate on the hot sectors. As they ride the market, some analysts become promoters. Researchers who remain rational practitioners, are ignored, and their reports should be read more.

How Equity Research Is Changing: Identifying the role of research in today's market requires distinguishing between Wall Street research and other research. The major brokerage firms provide Wall Street research—typically sell-side firms—both on and off Wall Street. The research produced by independent and boutique brokerage firms is also important. First, Wall Street research has shifted to large, very liquid companies and ignores the majority of publicly traded companies. Wall Street firms have emphasized big-cap stocks as a source of highly lucrative investment banking deals and trade profits, but they also have to cut costs to remain profitable. Stocks deemed worthy of following by the market will likely provide the research firms with large investment banking deals. The long-term investment potential of the stock is often secondary.

Investments: As a measure of the value of research, institutional investors are willing to pay a considerable amount for their analysts. Institutions may also pay for sell-side research they receive with dollars or by executing trades with brokerage firms supplying the research despite the significant decrease in spending on equity research analysts in recent years.