What Is a Security Analyst?

A security analyst is a financial professional who studies various industries and companies, provides research and valuation reports, and makes buy, sell, and/or hold recommendations.

Understanding Security Analyst

Security analysts follow the performance of one or more stocks, sectors, industries, or economies in the market. Futures contracts are not securities because their performance is not dependent on the management or activities of outside or third parties. Options on these contracts are, however, considered securities since performance is dependent on the activities of a third party.

A security analyst runs fundamental and/or technical analysis on securities in the market in order to help retail and institutional investors make investment decisions. Fundamental analysis relies on the fundamental business factors such as financial statements, and technical analysis focuses on price trends and momentum. The evaluations run by a security analyst determines whether s/he puts out a buy, sell, or hold recommendation in the financial markets. Clients and third parties usually pay for access to these reports.

The analysis done on securities involves gathering and interpreting financial data. The data is retrieved from a number of sources, including financial statements made publicly available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database online, financial publications, information-sharing with financial researchers and other analysts, etc. By building financial models on the data, a security analyst can better understand the financial health and profitability prospects of a company or sector.

Depending on the reason for the analysis, an analyst may be tasked with making earnings estimates for a company's future earnings per share (EPS). By placing estimates on the earnings of a firm for certain periods (quarterly, annually, etc.), analysts can then use cash flow analysis to approximate the fair value for a company, which in turn will give a target share price. Security analysts' earnings estimates are often aggregated to create a consensus estimate, which is used as a benchmark against which the company's actual performance is evaluated. An earnings surprise typically occurs when a company misses the consensus estimate either by earning more than expected or less.

Securities analysts work for investment banks, private equity firms, venture capital firms, hedge funds, and research companies. They are involved in corporate events, such as mergers and acquisitions (M&A), corporate restructuring, bankruptcy, and other organizational moves that can impact the financial value of a firm.

Security analysts are apt with spreadsheets and numbers and should be able to effectively explain the results of their analysis to clients, management, and peers in the industry. Many analysts have undergraduate degrees in the area of finance and take on additional certifications post-graduation (e.g., CFA) to increase their knowledge of the capital markets.