Wednesday, March 5, 2014

Understanding Analyst Ratings

     When looking at a stock you will often see an analyst rating.  These ratings often come from a financial institution and is based on a company's financials, earnings reports, or future products and outlook.  These financial institutions typically give a stock one of 5 ratings indicating what an investor should do.  Many times a rating is increased or decreased when a financial institution raises or lowers a price target for a stock.  Also note that many larger financial institutions have holdings in stock or may want to invest in a company, and though it is not ethical, this may factor into their rating for a stock.  Below is an example of Analyst Ratings for Yandex from the website MarketWatch.

From worst to best the analyst ratings are as follows:

Sell - The investor should sell the stock as the performance of the company has been poor and the stock price is likely to decline in the future.

Underperform - The investor should look to selling some or all of the stock as the performance of the company is not expected to meet expectations.  This may be caused to competition in the market, product issues or other factors such as weather as many stocks have been blaming recently in their earnings.

Hold - The investor should hold their current stock as the performance of the company is expected to meet requirements. Often stocks are a hold while they are continuing slow growth or maintaining their expectations.

Outperform - The investor should look to buy small into a stock or maintain shares as the performance of the company is expected to beat expectations slightly.

Buy - The investor should buy into a stock as the performance of the company is expected to beat expectations greatly.  Often companies receive a buy rating when they release a new product, expand their market, or beat their competition. 

     As an investor you must be aware of these ratings and when a stock has received an upgrade or downgrade as it will affect the price.  Ultimately you want to already be in a stock before they receive and upgrade and sell a stock before it receives a downgrade.  Now as an average investor, without inside knowledge of these ratings it is difficult to time however you can take advantage of ratings.  Every investors ultimate goal is to buy low and sell high so do just that.  When a stock receives a downgrade lowering the price and telling you to sell, do just the opposite, buy the stock.

1 comment:

  1. This is helpful, but it doesn't really matter what an analyst says unless they have a proven track record of making the right calls. Someone can lose a lot of money by blindly following any given analyst's advice