Securities are traded in both the organized and over-the-counter markets. Organized markets consist of stock exchanges, each with a specific location for trading, a formal administrative structure, prescribed rules of procedure, a defined membership body, and facilities for providing various related services, such as stock quotations, to members. The United States has fourteen exchanges registered with the Securities and Exchange Commission (SEC), the chief regulatory body of U.S. financial markets. The two dominant exchanges are national-the New York Stock Exchange (NYSE) and American Stock Exchange (ASE). The remainder are regional, the largest being the Midwest and Pacific Coast exchanges.
All purchases and sales outside the stock exchanges take place in the over-the-counter (OTC) market, which is not defined by any geographical barriers or central marketplace. The OTC market is a telecommunications network which links a large number of brokers and dealers, who may or may not be members of an exchange. Since these securities transactions occur in many different places and are not reported to one central agency, it is difficult to determine the exact size of this market. However, in dollar volume substantially more securities are traded over the counter than on all national exchanges combined. Tens of thousands of corporations have issued publicly held securities; all these securities, except for approximately six thousand issues listed on the exchanges, are traded over the counter.
Regulation of Capital Markets
The Securities and Exchange Commission (SEC) was created by an act of Congress entitled the Securities Exchange Act of 1934. The SEC is an independent, bipartisan, quasi-judicial, federal agency which administers the financial markets through statutes designed to protect the interests of investors and the public. Its enactment followed the stock market crash of 1929 and sought to remedy many abuses that had led to the event. Most of these abuses emanated either from inadequate disclosure of information necessary for appraisal of the investment worthiness of a stock, or excessive manipulation of stock prices through interference in the supply-and-demand balance of a security. The laws administered by the commission, along with controls to minimize the creation of artificial forces of supply and demand, contribute to orderly financial markets.
Recent Changes In Structure Of Securities Markets
The last two decades have witnessed more fundamental changes in the organization of the securities market for corporate equities than any comparable period since the 1930s. Some of the most significant developments have been:
- In February 1971, the National Association of Securities Dealers (NASD) made an automated system available to brokers and dealers. This fundamentally altered the structure of the over-the-counter market by accelerating the disclosure of price information through high-speed telecommunications and electronic data-processing systems.
- In the early 1970s, responding to widespread concern over the progressive fragmentation of the equities markets (i.e., stock markets) during the 1960s and early 1970s, Congress and the SEC initiated a period of rule-making and legislative activity that culminated in 1975 in the abolition of fixed minimum commission rates (May 1, 1975) and the enactment of the Securities Act Amendments of 1975, which mandated development of a National Market System (NMS).
- The SEC departed from its historical position of favoring competing but separate marketplaces by advocating development of a Central Market System (CMS) to (a) centralize all buying and selling interests in order to maximize the opportunity for them to meet without recourse to a dealer, and (b) maximize market-making capacity in order to provide the greatest possible liquidity for large transactions.
Negotiated commission rates mean reduced commissions for financial service institutions; rising trading volume and the resulting need for fast execution necessitate economies of scale; and heightened volatility demands larger financial cushions as risk insurance. Securities firms have had to become larger to meet these demands and survive. This has led to an acceleration of the inter-brokerage mergers that began in the early 1970s, and has resulted in fewer, larger securities firms.
Choosing A Career In Business
The next step is to make a roster of publicly traded companies in the industry. This list is then edited considerably, as you tailor it to the investment needs of your firm's clients. For instance, if the firm's client orientation is primarily institutional, the companies you consider must have adequate market capitalization (number of shares outstanding) and daily trading volume in order to qualify as a possible investment opportunity. Other criteria may also be considered; it all depends upon your firm's investment policy.
Once a "short list" has been developed, you would gather and review publicly available information on the companies. This includes annual reports, financial documents such as lOK's and lOQ's, proxy statements, prospectuses, and secondary material. In reading through the material some firms' achievements may catch your eye: a good product mix, savvy acquisition, or efficient distribution mechanism. Sometimes analysts do "computer screen analysis" along key operating and stock performance dimensions-such as growth of earnings per share, operating margins, price to earnings ratio, or book value to market value ratio-to pick out promising companies.
If you decide that a company deserves further consideration, you may arrange a visit to speak with its personnel in order to assess their operation first-hand and evolve an understanding of its corporate or business strategy. In preparation for the visit, you would study the company thoroughly. This might include reading the past ten years of annual reports for key events (acquisitions, divestments, management changes and geographical expansion), performing a computerized time-series financial statement analysis, and assessing absolute and relative stock price performance. You would then prepare a comprehensive list of questions to ask the company's controller, financial relations representative, or president.
Your direct assessment of management and company operations may or may not confirm your initial impression of the company. If the visit is disappointing, information gathered thus far may be shelved for possible use in the future, and your present inquiry stopped. On the other hand, if the visit confirms your hopes, you would probably recommend the stock for purchase if it is currently undervalued.
Writer: In recommending purchase of a stock, writing skills become important to the analyst. Recommendations for purchase include a summary of the financial data analyzed, in which the accompanying prose is as important as, if not more important than, the figures themselves. The rationale for purchasing a stock must be clearly and persuasively stated. These reports normally contain extensive investment arguments.
Typically, as an analyst's company coverage grows, he or she spends more time on "maintenance research" and less time making new discoveries. Maintenance research often requires prodigious output of written materials; this is expected by both the firm and client. These reports cover company quarterly results, investment implications of key developments, stock price performance and trading behavior, and general industry conditions. An annual publication list of the work done by a typical security analyst might include the studies and reports.
The importance of timeliness with these reports varies. Quick reaction to quarterly company results and major special events, such as a merger or acquisition, is essential. Other reports, such as special ones issued on an "as desired" basis, may have more flexible publication schedules. However, analysts generally work according to stock market time, which is fast paced.
Marketer: Brokerage firms receive revenues when they trade securities: The more they trade, the more fees they collect. Therefore, analysts must conduct research that is likely to result in the trading of securities. The increased competition among brokerage firms in the past decade has resulted in analysts having to spend more time marketing their "products" to both brokers and institutional clients. The sales department is primarily responsible for selling the firms' services to clients, and analysts must sell their services to the brokers.
Although some securities trades are client initiated, many occur because brokers or analysts alert their clients to trading opportunities. Keeping clients aware of these opportunities can expand the firm's business by encouraging them to buy or sell. Therefore, it behooves the analyst to keep the research product before brokers and clients as much as possible. For small accounts he or she may retain a client on a mailing list and respond to calls. With large clients, however, successful analysts are usually more visible. They may support trading activity by contacting clients regularly to keep them up to date. With corporate or institutional clients, analysts often cultivate a close working relationship with their counterpart analyst in the client's finance department (the "buy-side" analyst).
Most firms keep records of analysts' written and oral communication with clients: to whom they speak, for how long, and about what. Firms may subject analysts to call quotas, circulate monthly summaries of "client contacts," and report page counts by analysts in order to stimulate competition and productivity.
Both intra-firm and inter-firm competition exists, which underscores the importance of marketing to the analyst's job. Greenwich Research Associates of Connecticut furnishes a comparative rating of rival brokerage firms' research products, based on buy-side analysts' rating of sell-side analysts' work. Institutional Investor sponsors an annual contest that assembles an "All-American Research Team" of "number one" analysts, with second-place, third-place, and runner-up teams. These contests are taken very seriously.
Your success as an analyst will be measured to a great extent by your marketing ability. You will succeed if your firm's clients find your research useful in making investment decisions, and execute transactions based on your recommendations through the firm's sales force. Generally, your compensation will reflect your degree of success with clients. Therefore, you must couple thorough, well-written research with aggressive, persuasive marketing.
In many ways, being securities analyst requires that you act as a corporate entrepreneur and empire builder: You must always look for expansion and growth. Although it varies by position and firm, many analysts enjoy a great deal of license in determining their own style of work and how best to cover their assigned industry. Approaches vary, but the research and writing are characteristically solitary pursuits involving little interaction with other analysts and firm personnel. Generally analysts are not team players.
Many of the skills and abilities you need to succeed as a securities analyst already have been covered, but the following list outlines the most important:
- Facility with numbers analytical orientation: an inclination to figure out how and why things work thoroughness organizational ability
- Good memory ability to communicate effectively, both orally and in writing powers of persuasion diligence and tenacity
- Many different types of people succeed as securities analysts, but it is possible to isolate some personal characteristics common to successful ones: a strong ego and sense of self, individualism, the ability to exude confidence, and being outgoing and competitive.
- The educational background of securities analysts varies, but it is commonly a prerequisite to have a degree in business, usually an MBA. Those hired without MBAs are encouraged to pursue one on a part-time basis. Some analysts have had prior business experience in the financial service industry, perhaps including time as a buy-side analyst. Some have moved from a background in statistical research, either at the same firm or another research group, to their present securities analysis position. Still others have had work experience in an industry which they subsequently cover as an analyst. While working as analysts, some continue studies in the field by participating in programs conducted by the Institute of Chartered Financial Analysts. These programs prepare applicants for three rigorous examinations, which upon completion entitle them to carry the assignation Certified Financial Analyst.
