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What Are Financial Analysts?

Financial analysts are research analysts that study the performance of publicly traded companies in the exchange market. They cover different types of securities, often specializing on one type (say, equities). They make their recommendations public, and investors often base their trading decisions on their ratings.

The Important Role of Financial Analysts

Should you or should you not buy Company A's stocks? Should you or should you not invest in mining companies?

Answering such questions require that you understand the factors that determine security prices in order to predict what will happen in the future. When deciding whether or not to invest in a specific company, moreover, you also need to know how good or bad it has performed in the past.

Gathering all the information you require to make trading decisions will definitely take you a lot of time and effort. It can also be a bit impractical to do all that research when you have a lot of other investment decisions to make. For these reasons and more, investors often turn to financial analysts.

Financial analysts provide investors a basis for their trading decisions. They study companies and sell/report their findings to the public. They provide an important service. Instead of conducting their own research, investors only have to read a financial analyst's report. With the help of research analysts, investors don't have to wait months to decide whether to invest in a company or not.

3 Types of Financial Analysts According to Affiliation

Research analysts can be classified into three types depending on who they work for. The following are the three types of financial analysts according to affiliation:

  • Research analysts that work for firms that buy securities

    Investment advisers, investment newsletter service providers and managers of investment funds (e.g. mutual fund, hedge fund) need information in order to make trading decisions for their clients. They hire financial analysts to provide them with this information.

    Financial analysts that work for institutional investors (companies or entities that mainly buy or collect securities for their shareholders or clients) are known as buy-side analysts.

  • Research analysts that work for firms that sell securities

    Brokerage firms hire financial analysts to analyze and assess the viability of securities they deal in. Financial analysts' reports guide buyers into making their investment decisions. If a financial analyst is good at what he does, he will be right most of the time. The brokerage firm will benefit because it will gain more clients.

    Brokerage firms sell securities, among other things. Thus, financial analysts that work for brokerage firms are often called sell-side analysts.

  • Unaffiliated financial analysts

    There are also securities analysts that do not work for either sell-side or buy-side companies. These financial analysts are known as independent analysts.

    Independent analysts often specialize in a specific sector of the market. They usually offer their services to retail investors on a subscription basis. Only paying subscribers get full access to their reports.

Implications of a Financial Analyst's Affiliation

A financial analyst's affiliation may give rise to a conflict of interest. A sell-side financial analyst, for instance, may be conflicted about giving a company a negative rating if that company is a client of the brokerage firm that employs him.

This is not to say that a sell-side analyst's recommendations can't be right. This is just saying that you should be aware that financial analysts may be subject to conflicts of interest. In any case, you should never blindly follow any financial analyst's recommendations, whatever his affiliation.

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