The Role of the Stock Analyst
The stock analyst (or “security analyst”) can play a useful role in helping investors make purchase or sale decisions on particular stocks. The stock analyst is a financial professional with expertise in evaluating stock investment opportunities.
Stock analysts typically work for brokerage firms, investment advisors, or mutual funds and conduct research so that the brokers can make their recommendations to clients. The analyst will often have earned a Chartered Financial Analyst (CFA) designation and may specialize in a specific industry or sector to develop a deep level of expertise in that area.
After conducting their research, the analyst offers a “buy”, “sell” or “neutral” recommendation for the security. A “buy” rating is not an indication that all would-be stock investors should immediately purchase the stock, just as a “sell” rating does not mean that every owner of that stock should sell right away. Instead, investors should be governed by their own unique financial situation and common sense and use the analyst ratings as a single data point in an overall investment strategy.
How Accurate Are They?
The empirical evidence indicates that, on the whole, the analysts have a decent track record. Investors are encouraged to not take their recommendations at face value, though. Instead, you should consider adjusting ratings down a level to compensate for a seeming reluctance to offer a harsh opinion on a stock. In other words, you might downgrade a “strong buy” rating to a “buy”. A “buy” rating might be seen as “neutral” and so forth. It is also recommended that the investor pay greater attention to negative ratings from the analysts than to positive ratings. The data demonstrates that analysts are correct more often when they’re critical of a stock.
Beware of a Conflict of Interest
A 1999 study found that analysts tended to be more optimistic about stocks underwritten by their companies than they were about stocks underwritten by others. It follows then that a company going public might choose to work with an investment bank that can offer a positive report from a well-respected analyst. Such a stock analyst can positively influence the offering price, raising more money for the client company. It is a good idea to read the prospectus to understand the nature of the relationship, if any, between the analysts’ company and the client company.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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