A Quick Guide to the Basics of Being a Financial Analyst

What it's Like Being a Financial Analyst
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“Buy!” cries a man wearing a button-down shirt with sweat staining it a darker blue in certain areas.

SLAM! The phone hits the receiver before he’s picking it back up and dialing again.

We’ve come to recognize this scene out of movies like The Wolf of Wall Street and Cameron Diaz’s role in What Happens in Vegas. These people are out there buying and selling stocks on the stock market.

It all seems so jumbled, chaotic, and downright impossible to follow. Quite frankly, this is what deters me from ever trying to understand investments and stocks and bonds in general.

But there is actually a method to the madness of businesses and wealthy investors who choose to buy, sell, or trade their equity on the market. A large part of that method has to do with financial analysts. These are the people behind the successes as well as failures of those who play on Wall Street.

And financial analysts are not only helpful when it comes to investing. These are also the people who keep track of budgets and help departments spend their money wisely.

Interested in learning a little more about this profession? Read on for a quick guide to the basics of being a financial analyst.

What is a financial analyst?

Let’s start with a basic definition. What does a financial analyst do?

Financial analysts gather all kinds of financial information and after analyzing that information, give advice and recommendations to clients about future financial decisions.

Okay, okay, okay. That’s a pretty general description and doesn’t give you the best picture of what a financial analyst actually does. I think we should take a closer look and break it down.

An In-House Financial Analyst:

Let’s begin with an in-house financial analyst. This type of analyst can be found in just about every type of company or organization. Not every company has one of these analysts on staff—it depends on the size and need of each individual organization. An in-house financial analyst evaluates a company’s budget or the budgets of certain departments within that company to make sure they’re staying on track with their spending.

This means looking over spending and budgeting spreadsheets, doing financial forecasting, and hunting down any inconsistencies within these reports.

If you’re interested in this side of financial analysis, check out the rotational program that this recent graduate went through in Silicon Valley.

But if you’re more interested in working as an investment financial analyst, like the ones you see in movies on Wall Street, your work is slightly different.

We take some time to dissect that type of financial analysis below. But before we start, let’s go through some investment terms that will help you get a better idea of what a financial analyst on Wall Street has to know.

Terminology

Stock: Remember way back in kindergarten when we were learning how to “share”? Well, now it’s time to revisit that concept. Just like all of the toys in the classroom could belong to the entire class and not just Jimmy, publicly traded companies can be owned by more than one person. By “investing” in stocks, you’re buying part of the ownership of that corporation. The difference is, the more you buy, the more ownership you have. Too bad we didn’t have that option in kindergarten, huh?

To make money in this type of investment, you need the desire for this company to go up so that people want to pay you more for that part-ownership than you paid to begin with. OR the company may be doing so well that they decide to give the people who are sharing it some money (a dividend).

Bond: you can look at a bond as an “I.O.U.” In this investing situation, you act as a creditor and are loaning your money to the city, government, or company with the promise in mind that they will pay you back in full, plus interest.

Securities: A document that represents your ownership of a stock or bond.

Mutual Fund: A professionally managed investment program made up of a collection of funds from a lot of different small investors.

In other words, if you’re not a large company or aren’t one of Forbes’s billionaires, a mutual fund allows you to diversify your investment portfolio (rather than choosing a single stock or bond) with the help of a professional portfolio manager.

Each investor will gain or lose proportionately with the amount they invested. It’s a way for smaller investors to have access to larger and more diversified portfolios of stocks, bonds, and other securities with the help of professionals.

Hedge Fund: Another investing program that is only open to “high-rollers.” This is partly because the investment tactics are unregulated by the United States government. This allows for riskier but also potentially more rewarding investment decisions. To learn more check out this post from Investopedia.

Brokerage Firm: A brokerage firm is an organization that assists the process of buying and selling securities.

Okay. Now that you know some basic terminology, let’s take a look at the two sides of financial analysis that take place on Wall Street.

Sell-side Analyst (the long version):

Sell-side analysts usually work at brokerage firms recommending buying or selling based on research that they have done.

A sell-side analyst’s day is spent gathering company and industry knowledge, macro and microeconomic information, as well as keeping on top of any/all current economic happenings.

This research is then organized into research reports and earning models which are sold to buy-side clients. Sell-side analysts do not use their research for their own investments. Instead, the end goal is to sell this information to buy-side analysts who will use it to help their own firm/client’s investment decisions. In addition to that, based on the research they provide, sell-side analysts want buy-side clients to make a trade with their trading desks because it will lead to getting paid a commission.

Because sell-side analysts are trying to sell their research there is a little more marketing in this profession than there is on the buy-side.

LifeontheBuySide.com has an awesome interview with a sell-side analyst that not only gives you a more detailed look at this career (the difference between working for a large firm and a small boutique firm) but also an inside look at how to break into the industry.

Sell-side Analyst (the short version): researches investments and sells the results to buy-side clients

Buy-side Analyst (the long version):

Buy-side analysts work with mutual fund, hedge fund, and pension fund managers as well as managers of wealthy individuals’ investment portfolios. The research that they do (along with the information bought from sell-side analysts) is used to inform the managers of these funds whether to buy, sell, or trade.

A buy-side analyst’s day is often similar to that of a sell-side analyst. There is a lot of catching up on current events, research, and analysis of that research. The difference is that instead of selling this research to someone else, it is used to inform the decisions of the money managers within the institution in which the buy-side analyst works.

Buy-side Analyst (the short version): researches investment options (including gathering information from sell-side analysts) to inform money managers how to invest their clients’ money.

Not sure which side you want to work for? That’s fine. The truth is, as a junior financial analyst, your duties are basically going to be the same no matter where you start out. It’s just good to keep the two options in mind as you move through your career.

So, what are the typical duties for a junior financial analyst?

  • Gathering data based on the niche industry their firm focuses on
  • Working on/updating financial models
  • Keeping up-to-date on industry news and economic reports
  • Updating files and spreadsheets based on new information from the news or data gathered
  • Attending meetings with senior analysts

*As a junior analyst, you’ll probably also be studying for licensing through a Chartered Financial Analyst (CFA) exam, series 7, and/or series 63.

Pros:

  • High wages
  • High advancement opportunities
  • You’re not limited to one industry

Cons:

  • Very competitive
  • Many of the positions available in this industry require a license of some sort
  • Long hours
  • High stress

The sell- and buy-side analysts are probably the most well-known of financial analyst positions, but if the cons look like they might outweigh the pros for you, there are other options. Remember that you can be an in-house financial analyst like we mentioned above. Or, you might want to check out other positions that allow you to crunch numbers, discover discrepancies, and solve money problems like treasury management or risk assessment managing.

Homework time: Not sure where to start in order to become a financial analyst? Check out this post about a recent graduate who discovered her love of numbers after starting college.

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