An analyst rating is the measure of the expected performance of a stock or security during a given time frame. The analyst rating tells investors what the analyst thinks about the company, its industry, competitors, and future direction of the stock. The rating gives the target price together with the rating. Ratings can be a buy, hold, sell, etc.
Types of ratings
The following are some of the ratings many corporations and private entities use. Source: Zacks.com.
- Strong buy
- Buy
- Hold
- Sell
- Strong sell
The analyst rating from rating brokerage firms or independent companies can help you in your investment. You can tell how well the company is doing and where the analyst thinks it will go in the near future.
For example, let us say that you want to buy shares of XYZ stock that is currently trading at $3 per share. However, you don’t know how well the company will perform in the future.
To find the answer to your question, you decided to check its expected performance using analyst ratings. If the projected rating is $12 with a strong buy, for example; it means that rating firms have a conviction that the stock will indeed move up.
You need to understand that the rating does not guarantee the price target. Instead, it is a prediction of the future price based on the company’s performance, competitors, industry, and more.
As an investor, you must do your own homework and treat the rating as a second thought on the company you are interested in.
It is always a good idea to use multiple rating firms. For example, if 10 out of 11 rating firms are giving your stock a strong sell; you may need to think twice before you put your money into it.
Example of equity analyst firms
- Goldman Sachs
- Citigroup
- Bank of America Merrill Lynch
- UBS
- Zacks
- JP Morgan Chases and Co
- Morgan Stanely
Is the analyst rating accurate?
The rating you get from an analyst is the future prediction of the security’s price from its best research professionals. The market moves up and down, and therefore, it is hard to tell what the stock’s movement will be.
There is no guarantee that the price will reach that prediction or it will even go in that direction. Anything is possible in the stock market.
You should always treat these ratings as an investment guide rather than an accurate future direction.
