Financial Security Analysis
This article examines the process of financial securities analysis as well as the work conducted my financial securities analysts. Various specialties with which financial securities analysts are concerned are illuminated. In addition, the regulation of the financial services industry is reviewed along with how the regulations impact financial securities analysts and their clients. The organizations that lead or participate in these government and self-regulatory efforts are reviewed. The impact of globalization on the complexity of financial markets and thus the work of the financial securities analysts are also examined. Finally, the studies called for by the Emergency Economic Stabilization Act of 2008 (EES Act) are reviewed.
Keywords: Economic Crisis; Emergency Economic Stabilization Act of 2008 (EES Act); Financial Advisers; Financial Securities; Fiduciary Responsibility; Global Economy; Market Regulation; New York Stock Exchange (NYSE); Regulatory Modernization
Financial Security Analysis
Financial securities are economic investment instruments that provide a means for individuals, investment banks, mutual funds, or retirement funds to invest money in a company, an industry sector, or even a region of the country or the world. These securities have several purposes.
- First, they facilitate the process of attracting investors by providing an investment mechanism that is openly and publicly scrutinized by securities analyst and other investors.
- Second, they provide a means for investors or securities buyers to invest their funds and track their wealth and eventually receive dividends. There is a wide range of financial securities including stocks, bonds, and notes.
These securities are brought to the market in a variety of ways. Companies can issue and sell stock publicly or to private investment groups. Mutual funds can sell shares to individuals or retirement funds. Government entities such as municipalities, school districts, or libraries, can issue bonds for building projects. Governments can also establish programs like the United States Savings Bond which allows investors to gain a low yield in a highly secure investment instrument.
Financial Securities Analysts
The financial securities market is complex and detailed. The role of the financial securities analyst is to understand and research a specific aspect of the marketplace and provide analysis to investors or others interested in the market. Financial securities analysts are versed in the many forms of written material about their area of expertise. This could include corporate financial statements, annual reports, industry news, or government indices that may show trends that impact companies or sectors reviewed by the analyst. Market activity is monitored by the securities analyst which includes stock prices, product or service pricing offered by companies in their area of expertise, and global trends and events that could impact either stock prices or corporate revenues.
Financial securities analysts are employed by a variety of organizations. Investment management firms, or those companies that help individuals or institutional investors mange their portfolio, employ financial securities analysts to help determine if a company or even an industry sector will provide a good return. Brokerage firms, those companies that sell financial securities to investors on behalf of the organizations seeking investors, employ financial securities analysts to help advise or attract potential buyers of the securities. Mutual funds, as another example, may employ their own financial securities analysts to help guide the investment strategy of the fund ("Financial analysts," 2009).
Large financial services firms that sell stock or invest large sums in a company are most likely to employ securities analysts to focus on the specific company. The analyst responsible for that research watches the activities of the company on a daily basis. This includes monitoring stock prices, reading reports issued by the company, as well as reports from other analysts about the company. The securities analyst may also attend meetings or conferences sponsored by the company or events where the company or industry may be a topic. The 2008 economic downturn resulted in many financial securities analysts being laid off from large brokerage and investment firms (Pressman, 2009).
Securities analysts that focus on an industry, such as the automotive, telecommunications, or computer industries, watch the activities of the large or otherwise significant companies in that industry sector. The analyst also reviews reports issued by or about the companies that have an impact in or on the industry. Most of the analyst's attention is focused on the larger companies as they draw the largest amount of outside investment. However, newcomers or start-up companies to the industry are also of interest if they have a new or innovative product offering that may impact the industry or make them an acquisition target. Industry analysts must also monitor business trends or government actions that could significantly change business practices in an industry (Ennis, 2009).
When financial securities analysts focus on a specific region of the United States or of the world, their research is far broader but generally has less depth. These analysts are often fluent in one or more of the languages of the region in which they specialize. The regional analyst is also likely to spend considerable time in the region in which they specialize and will attend major business or trade events that examine or showcase the companies in the region. The activities of the larger companies in the region are monitored by the analyst along with the policies of local governments toward business, globalization, and world trade.
Regardless of their specialization, a financial securities analyst needs an in-depth understanding of business financial practices; especially those that impact stock prices or draw investors. Analysts must constantly research their areas; most observers agree that research is the most important aspect of analysis (Birkner, 2009). Financial securities analysts also need to understand how political, economic, and social conditions impact business. An understanding of investors focusing on what investors desire to know about individual businesses and trends is also necessary (O'Dowd, 2009).
Globalization has made the work of financial securities analysts far more complicated. There are now numerous well-established financial markets in the world. The interconnectedness of these national economies means that when there is a downturn in one country, most markets will feel some sort of shock wave ("A three-year global recession," 2009). The globalized economy also means that government policies around the world, especially monetary policies can have far more than a local impact. This potential impact is often complicated to understand and sometimes impossible to predict (Mishkin, 2009).
The globalization of the economy and the accompanying widespread global trading of commodities, technology, and consumer products has also increased the speed of change. The benefit of this proliferation to national societies is that people have faster access to a wider variety of products and services. The downside of this interconnectedness is that when things go wrong, the damage is more widely spread. Polluting products or technologies, for example, are being sent all over the world with little if any effort to minimize their negative impact. Ecosystems, cultures, and communities can change and grow but they can also collapse. This adds more pieces to the puzzle that the financial securities analyst is trying to piece together (Halal, 2009).
Investment Portfolio Management
Financial securities analysis is an essential and ongoing activity for individuals who manage their own investment portfolio and for the managers of mutual funds or retirement pension funds. There is considerable public concern for the management of pension funds. This is especially true for multi-employer pension plans that typically cover workers in trucking, building and construction, and retail food sales. Many of these plans were established by labor unions and the companies that employ the union workers. These plans allow a union worker to maintain their pension fund even though they may work for several different employers over a period of years (Private Pensions: Multiemployer Plans Face Short- and Long-Term Challenges, 2004). The decline in value for pension funds can be very troublesome because the funds can end up being under funded, or in practical terms: Lacking enough assets to pay the promised pensions to members when they retire.
Individuals who manage their own funds have numerous sources of information that they can access and take into consideration. Opinions are mixed as to whether or not individuals should go it alone in managing their own investment portfolio. However, the dynamics of the 2008 economic crisis clearly show that many managers of large organized funds did not fair very well in protecting the wealth of their investors.
Fund managers also have access to many sources of information and expertise but they also have a fiduciary responsibility for the decisions that they make which impact the value of the fund that they manage on behalf of fund investors. This responsibility requires that the board properly directs fund activities and establishes a process by which investment decisions are appropriate and adequately documented (Moynihan, 2009).
Many mutual funds or pension funds have a board of directors that oversee the policies and investment decision making process utilized by the fund. The board is also responsible for regulatory compliance. Under the direction of the board, there is often one or more managers responsible for the investment process and operational activity...
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