Many new entrants to the finance industry will find themselves ending up either on the credit or the equity side by chance. Few will actively choose one or the other and get placed based on that choice, in large part because of the way finance careers typically evolve. The path is usually something like this:
Step 1: Graduate (not necessarily with a finance major)
Step 2: Get a job as a junior analyst at an investment bank (this lasts 2 years, typically)
Step 3: Get promoted in the bank or hired elsewhere as an analyst covering credit or equity
While step 3 could depend on what you were doing during step 2, it doesn’t always. Equity analysts are picked up from a two-year stint structuring credit derivatives or underwriting bonds. It doesn’t much matter because often analysts will be hired from their IB job to work in the same industry that they focused on at the investment bank. In other words, it’s the domain knowledge and not the knowledge of the asset class that matters.
Still, there are very fundamental differences between analyzing credit and equity that analysts will notice almost immediately.
The most obvious will be the compensation. Simply put, equity analysts can earn a lot more. This makes sense because of the second big difference between credit and equity analysis: the former has much less upside, as credit prices have a de facto ceiling and don’t tend to be all that volatile (even a distressed credit that fully turns around won’t go up in value by more than 4-5 times, while stocks going up 10x in a few years are much more common). The reality is that credit portfolios will stick around single-digit percentage gains year-over-year, but growth equities can go up much more. That means greater bonuses for equity analysts.
It also means a very different method of analysis. In many ways, credit analysis appears harder but equity analysis actually is harder. Here’s why: the models used in credit analysis will take up hundreds of different data points which are analyzed using complicated statistical tools. Equity analysts may rely on a few simple metrics that require basic algebra to understand, but because those variables are much more unknowable than the ones involved in credit, it ultimately relies on a kind of qualitative analysis that math cannot replicate. For this reason, equity analysts need to be more comfortable with uncertainty and discuss their analysis with more confidence.
Equity and credit analysis obviously involve different skill sets, but more crucially, they involve different personality types. Credit analysis is lower risk and more quantitative. Equity is higher risk and more qualitative. Understanding where you are most comfortable is the first step into deciding which path you should try to pursue—although you may ultimately find you have little say in the matter.