Credit Research vs Equity Research: Know the Difference

Anyone who makes a living with their brain needs to know that there are significant differences between these two types of research. In this article, we will help you understand the difference and the advantages of each one.

Credit Research vs. Equity Research

If you're a financial professional, whether as an investor or a trader, knowing the difference between credit research and equity research can help shape your career. Credit research is used to assess the financial health of a company. In contrast, equity is used to determine an investment's potential performance about specific asset classes such as stocks, bonds, real estate, and commodities.

The main differences between these two types of research are that credit research is used to evaluate a company's ability to pay its debts. In contrast, equity research is used to determine the investment value of a company. These investments are made using debt, equity, or any combination thereof.

Understanding Credit Research

Credit rating agencies, also known as rating companies or rating agencies, are companies that give credit ratings to organizations or entities based on their ability to meet short-term obligations and long-term commitments. The rating companies are not always government regulated but must follow stringent guidelines set by each country's regulatory body.

Credit ratings, or credit risk assessment, is a process that helps an individual or business to make informed and calculated risks. The rating agencies monitor the company or entity's ability to bill, repay or recover their debts. The process helps the experts assess the likelihood of an organization repaying its debts. This informs investors about whether they should invest in a particular company about its financial health.

Understanding the Difference Between Both of Them

Stock analysts undertake equity research to assess the worth of a company's securities. The equity research report helps investors make informed decisions when buying stocks in companies they think are most likely to perform well in the future. This is necessary as alone, the company's balance sheet or annual report can't give a complete view of the organization as a whole.

Equity research is undertaken by analysts who specialize in stocks and other securities. It attempts to measure what an investment opportunity would be worth when considering its past performance, present state, future performance, and growth potential. Equity analysts use different methods and techniques to gain information about a company. 

These include:

Sector-specific research: Analysts will take time to research and then assess the prospects of different sectors to create an investment analysis. The analysis helps a business take investment decisions. It entails:

• Analysis of different stages of a business cycle that covers business growth (expansion) and economic decline (contractions)

• Utilizing tools to understand competitive dynamics of a sector

• Assessing the prospects of an individual company or the sector as a whole

• Identifying strategies to improve the effectiveness of the sector 

• Creating reports on various industries within a sector to understand which one is more likely to outperform

Economic trends: A valuable tool for investors, economic trends held determine the health of an economy, historically, currently and futuristically. The vast data collected via economic indicators enables faster decisions for asset allocation, detailed industry breakdowns and investments. Indicators help identify trends, and keep an eye on inflation, PPIs, and GDP to identify and document economic trends.    

Company Visits: Analysts visit the company's headquarters and meet the management team, gain access to their records and observe how they operate. They grade the management team on its efficiency, which helps them get a better idea of whether the management team can make sound business decisions focused on credit research. 

Other Public Records: Equity analysts also look at public records such as financial statements, income tax records, and legal documents. This helps them identify any risk factors that could affect their investment in that company or organization.

Personal Meetings: To better understand the organization, equity analysts can meet with clients and other stakeholders. They can ask questions to determine what the regular customers think about the company and their experience with it.

Conclusion

The data collected by stock analysts is based on company reports, trade publications, or press releases. These factors give a very clear picture about company performance as analysts have access to information from all over. However, there are flaws in this information as not all information from public sources is reliable as fraudsters might have fraudulently falsified costs and revenue records to increase profits.