What Is Financial Analysis?
Financial analysis is a very wide field that requires a preparation in several subjects of economics, accounting, finance, and math. Don’t get me wrong financial analysis is not rocket science. But there are three things, which are very important:
- Understanding financial markets (macroeconomic and microeconomic)
- Understanding the main financial statements (balance sheet, income statement, and cash flow statement) together with the ability to analyze them (fundamental analysis, ratio analysis)
- Be up to date with the most important financial news (read financial publications, watch financial broadcasts and documentaries)
These three aspects imply not only an academic understanding of business in general but also a true interest that absorbs part of your personal time. In short, a successful financial analyst is the one that uses part of his spare time to stay up to date with financial news, read publications, and research new topics
I usually do not advocate for an excess of information when it comes to investing. In fact, I actually believe that investing is one of those fields where “noise” gets in between the investor and his potential returns. This principle is particularly true for long-term investors.
On the other hand, I do believe that the financial analyst has to be up to date with financial news out there. Indeed, as an analyst, you are part of the short-term game. In other words, you are selling information to your clients.
Therefore, the more new and appealing news you have at your disposal to include in your analysis the more your recommendation will look appealing to your clients. Therefore, I find legitimate for the financial analyst to spend part of his spare time to gather and play along with financial data. In short, you want to pick this field only if you are very passionate about it.
Some Useful Statistics
By looking at the US bureau of labor statistics, in 2014 the median pay for a financial analyst was $78,620 ($37.80 per hour). Usually, a bachelor degree is the minimum requirement to get into the door. In addition, this profession grew 12% faster than average. No wonder financial analysis is increasingly competitive.
But what are the main tasks a financial analyst is required to perform?
An Overview on the Main Tasks
The financial analyst may be required to perform a large number of tasks within his duties. Some of them are:
- Make recommendations on the portfolio composition
- Research and evaluate financial data
- Understand economic and business trends
- Financial statements analysis
- Valuation analyses in excel
- Written reports for investors or upper management
- Meetings with clients
Usually, financial analysts can be divided into two main categories:
- Buy-side. Usually, the analyst manages a portfolio for the company he works for (hedge, pension, mutual funds and so on) and he is supposed to recognize investment opportunities to grow the portfolio he/she manages.
- Sell-side. It requires the analyst to make recommendations on certain stocks. Many times you work for third clients. For instance, think of a company that sells reports to third investors. The analyst produced these reports for the company he works for, and then this company sells these reports to third parties. This kind of job requires a lot of analysis and research.
No doubt the financial analyst must have analytical skills. But what does that mean? Let’s see the definition given by the business dictionary:
“An examination of data and facts to uncover and understand the cause-effect relationship, thus providing the basis for problem solving and decision making.”
In other words, the analyst has to be able to deconstruct the data and facts available and eventually provide recommendations (decision making) to buy, hold or sell certain stocks. In doing so, the analyst has to research extensively into the topic he is covering (detail oriented).
Once those facts and data have been gathered and examined, the analyst will build a model, usually in excel. At the end of the analysis, the analyst will create and present a report that must clearly communicate the result of his investigation.
In short, the financial analyst has to be detail oriented, problem solver and communicative.
From the technical standpoint, the use of the Microsoft Package (Excel Macros and VBA in particular) is crucial for the job.
The minimum academic credential required to become a financial analyst is a bachelor degree in business administration or any related field.
After completion of the bachelor degree if you want to get to the next level it is advisable to enroll in an MBA or a master degree in finance. This isn’t the only path to be successful.
In fact, given the high cost of enrolling in an MBA or master, I would suggest you undertake the path of the self-taught financial analyst. Let’s see how to achieve that.
One of the most recognized certifications in financial analysis is “CFA” or “Chartered Financial Analyst.”
Taking that certification would be the best path. On the other hand, it also requires a lot of time to get there and we want to become familiar with the subject as quickly as possible. Therefore, you may want to consider to follow their “course of study” just to understand what are the most important topics in the financial industry.
For instance, the first CFA level requires the understanding of the following ten topics:
- Ethical and Professional Standards
- Quantitative Methods
- Financial Reporting and Analysis
- Corporate Finance
- Equity Investments
- Fixed Income
- Alternative Investments
- Portfolio Management and Wealth Planning
You can find the detailed program here.
As you can see the first level requires a great deal of knowledge, but how to start? Let me suggest you three books that can really give you a jump-start.
Three Books to Getting You Jump-Started with Financial Analysis
The books contained in this article although connected to Amazon are not affiliate links. In other words, I do not make any money by suggesting them. Those are the books I personally used and that is why I am suggesting them to you:
- Applied Corporate Finance 3rd Edition by Aswath Damodaran. Corporate finance can be a very intricate subject for the newbies. There are many books out there about the topic, but very few are practical as Damodaran’s applied corporate finance.In fact, the author uses a language that can be understood also by people that are just starting out. In addition, he points out all the most important tools that the financial analyst has to know to get the job done.
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl. Don’t be scared by the name. Although investment banking seems to be an esoteric subject that can be understood just by a small circle of people that rules the world, you’ll be surprised. In fact, investment banking is not rocket science and most of the time relies on the understanding of simple ratios and metrics that will be used over and over again. In this respect, the authors of the book made a great job of explaining the subject with the maximum simplicity.
- The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel by Benjamin Graham, Jason Zweig. Even though this book has been first published in 1949, it still remains the best book on value investing. In addition, the author has done a great job in readapting the book, by leaving its original chapters and adding additional chapters to contextualize it to modern times. If you listen to many of Warren Buffet advice you will see that this is the book that most influenced his life, together with Security Analysis.
The above books are useful to get you started with the technical and theoretical skills needed to be a good analyst. But if you are like me and want to also have an overall understanding of how the financial world works we have to dig deeper.
Three Books That Can Boost Your Understanding of the Financial World
Here I want to suggest you three books that can give you a deeper understanding of how we got to live in today’s financial world. In fact, these books will give you a historical excursus and also a wider outlook on how the financial world works:
- The Ascent of Money: A Financial History of the World, by Niall Ferguson. This book is by far one of my favorites when it comes to financial history. You will discover how our modern banking system was created, how the bond market started, when the first bubble took place, until the development of what the author calls “Chimerica.”
- Antifragile: Things That Gain from Disorder (Incerto), Nassim Nicholas Taleb. In this original book, the author introduced you to a new form of thinking. This book is part of a trilogy, called “Incerto” of which are also part “The Black Swan” and “Fooled by Randomness.” Although, the other two books are extremely interesting and they also prepare you for a better understanding of “Antifragile” you can still read it alone and still have a great understanding. Taleb introduced you to new concepts and to think in a more critical way. For instance, he tells us how the modern systems although they are gaining in complexity, they are also gaining in fragility. Meaning that an unpredictable event will wipe them out. To never take for granted what other say you have to read this book
- When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein. There are times in which large financial institution based on wrong beliefs can almost make the system collapse. LTCM (Long-Term Capital Management) was one of these cases. In fact, LTCM was a speculative fund and one of its partners was Nobel laureate, Myron Scholes. I really suggest you read the detailed account of this great failure of financial history, which can teach you much more than any other success.
Three Short Manuals – From Scratch to Professional Level
Most of the times what makes finance hard to learn and understand is the useless jargon used in manuals, which are too technical. The Four-Week MBA produced three short manuals with the aim to get you started with financial analysis. With an extremely low investment of money and time you will be introduced to the most important topics related to financial analysis:
- Financial Accounting Simplified Manual
- Corporate Finance – The Toolbox for The Financial Manager
- Fundamental Analysis – Simplified Manual: Simplified Manual to Understanding Fundamental Analysis
Three Documentaries to Watch
If you have more time to invest, you may want to consider to watch these documentaries:
- The Ascent of Money. This follows the same story from the book and Niall Ferguson directly hosts it. It lasts over four hours but it is worth the investment.
- Inside Job. To have a detailed account of the financial crisis of 2008.
- Chasing Madoff. The Madoff fraud was by far the greatest of all times. He was able to create a $50 Billion Ponzi scheme. The documentary shows how he was able to do so and how he was eventually caught.
There Is Not Better Way to Learn Than to Practice
The theory is a huge part of the training for a financial analyst, then of course practice kicks in. if you want to dirt your hands you can open a demo account at this link Oanda Demo Account to get you started with trading.
Some other tools useful to make some nice analyses and research:
- Google Stock Screener. This tool allows searching for any listed stock in several markets. In addition, you can also customize your search very easily. For instance, you can decide to look for all company that has a certain market cap, ROI, and so on. Start playing along with it to become familiar with some stocks you may find more interesting.
- Gurufocus. This platform is very interesting since it allows you to see how the gurus invest their money.
- Economagic. The great platform also, it allows you to get macroeconomic data of any kind (very suited if you operate in the US). Further in the excel section, you will find data already available in excel, ready for download.
Summary and Conclusions
As we saw in this article, getting started with the financial analysis is a very committing task. On the other hand, financial analysis can be very fun and rewarding job. Further, if you are someone already passionate about financial markets and business, in general, you may be lucky enough to make of this job your profession. I apologize for the length of the article, but I really tried to suggest the best resources available to give momentum to your training.
In addition, this website also provides free resources to get you started with financial statement analysis and finance in general. Don’t lose the chance to also download our free resources here.
Any comment on the topic would be highly appreciated. If you found that other topics also deserve to be covered, let me know in the comments below. Please understand that I really would love to give you the best information you can find on the web. On the other hand, I cannot afford to invest time and effort in producing resources that you may not find useful. Therefore, if there is any particular topic that concerns you, don’t hesitate to let us know at firstname.lastname@example.org
Good luck with your job search!
Grab a copy of the Portable Financial Guide available on Amazon:
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