Look at stock quotes on any financial news website and you’re likely to see analysts’ ratings that serve as recommendations for investors. Although some sites get more specific than others, most have at least three standard ratings: buy, sell and hold. Those ratings, along with other information provided by the quotes, can help you make sound decisions on whether or not to invest.
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How Do Analysts Come Up With Stock Ratings?
Investment research firms such as RBC Capital and Credit Suisse analyze companies and issue ratings based on their findings. The most common ratings are “buy,” “hold” and “sell.” The financial press looks at all the recommendations for a particular stock and publishes the average.
What Do Analyst Stock Ratings Mean?
“Buy,” “hold” and “sell” are the most common ratings, and their meanings are self-explanatory.
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A “buy” rating means analysts like the stock and think it’s worth purchasing because its value is likely to increase.
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A “hold” rating is neutral. It means analysts are unsure which way share prices will move, so they recommend that you neither buy nor sell.
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A “sell” rating means analysts expect share prices to fall.
Additional ratings allow analysts to make more specific recommendations.
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“Strong buy” is the rating analysts use for stocks they believe will perform exceptionally well.
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Analysts rate a stock “outperform” if they believe it will perform better than competitors in the same sector in the coming year.
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“Underperform” means analysts expect weaker performance compared to the broader market.
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“Strong sell” is the most negative rating, reserved for stocks analysts expect to perform very poorly.
How To Use Analyst Ratings To Make Investment Decisions
Stock ratings are most helpful when you view them in a broader context. One way to do that is to check the stock quote for a list or chart that shows how many analysts rated the stock and how they rated it. For example, if 40 analysts rated a particular stock, the chart will show how many of the 40 rated it a “strong buy,” how many rated it a “buy” and so on. It also might show the ratings from the last few months, which lets you identify subtle shifts in analyst sentiment. Those shifts can be an early warning that a stock might be ready to take off or falter.
Price targets also add context to ratings. Price targets are predictions analysts make about the value of the stock in the coming 12 months. Stock quotes usually include the lowest, highest and average prediction, plus the current price. Subtracting the current price from the price target gives you the “upside” or “downside” — the amount analysts expect a stock to increase or decrease relative to its current price.
Even the most successful analysis firm, Keefe, Bruyette & Woods, is only right 65% of the time, according to a 2023 CNBC ranking of the best Wall Street research firms. That’s why it’s important to look at the average rating and the range of ratings over time, as well as price targets, to get a more accurate view of how analysts feel about a certain stock.
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This article originally appeared on GOBankingRates.com: Buy, Sell or Hold: What Stock Analyst Ratings Mean and How They Can Help You Make Investment Decisions
