What is a research report?

A stock research report, or equity research report, is a document a financial analyst, equity analyst or research professional prepares that offers advice for investors who trade stocks publicly. Usually the reports help investors decide if it’s best to sell, buy or hold their shares from public companies. Research reports might contain information about the company’s performance, market activity for the industry and specific business elements like risks, financial updates and management processes. Using the information in the research report can aid investors in making informed financial decisions.

Specific companies might focus more on internal or external reports, also called buy-side and sell-side reports. Internal, or buy-side, reports are reports internal analysts produce for businesses like asset management companies to inform their own stock decisions. These reports are often private and the company’s portfolio managers might use them in their decision making. Buy-side reports are reports that a bank or investment firm might use to help their clients make informed decisions regarding their share purchasing choices. Usually, clients and members of the public can access these reports for free.

Related: How To Become an Equity Research Analyst (With Job Duties)

Why are stock research reports important?

Stock research reports are important for many reasons and the information they contain can have considerable effects on investors’ financial choices. Here’s a closer look at some of stock research reports’ top benefits:

They help investors make informed financial decisions

Whether a report’s intended audience is a bank’s clients, an asset management company’s portfolio managers or the public, the information within the reports can offer helpful insight and recommendations for investors. Usually, reports include a recommendation on whether to buy, hold or sell shares, with supporting evidence for the recommendation, like a company’s margins or management practices. Using the information in the report, readers can decide how they wish to proceed with their own investments, increasing the success of their purchasing plans and, hopefully, increasing the strength of their portfolios.

Related: How To Calculate Expected Return

They offer comprehensive insight into the health of a company or industry

Stock research reports often aim to be as thorough as possible in their conclusions and research, ensuring the content within the report is accurate and useful for investors. They might comment on market trends, a company’s performance within its industry or practices within the company. All the data and information an analyst collects can add to the completeness and usefulness of the reports.

Related: 6 Steps To Conducting Market Research

They often assist banks and investment companies in gaining new clients and business

Sell-side reports, usually those that investment banks and other investment companies create and offer, can help banks attract clients. While not a contractual or legal obligation, using the recommendations within a report can mean you trust the financial institution responsible for producing it. This can lead clients to use the bank as the executor for their trades. For existing clients, reports might urge them to invest in more stock from a specific company. When the decisions are wise, this can lead to increased profits for both the banks and the clients.

Components of a research report

The contents of a research report can vary depending on its audience and intent. Here are some common elements many reports contain:

An investment recommendation

Most equity reports contain a recommendation for investors to either sell, buy or hold on to their shares. A sell recommendation might come if there are better investment opportunities or if the company is about to experience a major change, like if it’s being acquired. Buy recommendations might come if the share prices are low and expected to rise, if the company shows signs of long-term growth or if future business moves appear promising. A recommendation to hold could come for long-term investors waiting out market fluctuations.

Research experts make their recommendations for many reasons, and those reasons can become complicated. In fact, that’s why many investors seek the advice and experience of industry professionals who evaluate stocks and company performance for a living. That said, recommendations can sometimes be biased, and even a thoroughly researched equity report might make a faulty recommendation.

Here are some ratings a company might use to make their recommendation:

• Buy: A report might also use the words overweigh or outperform. This is for when the price target is higher than the actual price.
• Hold: Hold, market weight or neutral is a recommendation that says that shares have prices close to the target.
• Sell: Sell, underweight or under perform might be ratings a report gives to a company with overvalued shares.

A price target

A price target is a price an analyst believes reflects the true share value. A rise in the price target often means the analyst expects to see a rise in the actual share price. The reverse is also true. Price targets can be helpful guides in understanding whether the reporting institution considers the share to be over or undervalued.

Related: What Is an Equity Analyst? (With Duties, Skills and Tips)

Timely company intelligence

Many reports also offer insight into company activities or changes. If the company is launching a new product, changing its management style or its employees are investing heavily in the company’s stock, analysts might include those details in the report. Information like this can be relevant to investors and help them understand a company’s activity. Contracts, quarterly or annual reports and recent news can also be valuable inclusions.

A report summary

Also called the investment thesis, many research reports contain a summary showing why the price target and valuation rating is what it is. It might offer insight into why the reporting institution expects prices to rise or fall. For many, the investment thesis or report summary is the most valuable section of a report.

Related: What Is Investment Management?

Company financials

Research reports also often contain a summary of a company’s financial performance. Financial documents, like business valuations, cash flow statements, balance sheets and income statements, might make up this section of the report. Analysts typically use spreadsheet and analysis programs to create financial models that can predict future performance and trends. They might use graphs to represent this information within the report.