Analyst ratings are stock ratings given by specialists within banking or financial institutions. Stock ratings measure how specific stocks or industry sectors are expected to perform over a given time. Both analysts and brokerage firms use these ratings to advise recommendations to stock traders.Analysts usually rate stocks every quarter- four times a year. They base their ratings on the health of a company’s financial statements, the insight executives have on the company’s plans, and the feedback customers have on its product(s) or service(s).
Here are four steps on how to interpret and apply stock ratings to make more profitable investments.
Analyst ratings should be used as a guide. They are estimated guesses made by professionals who spend their careers studying specific sectors. Because each financial analyst does their research, it’s no surprise that ratings vary across individuals. This is why the accuracy of analyst ratings cannot be measured. Nonetheless, analyst ratings are an excellent source that helps build your own trade ideas.
Analysts study a stock from top-to-bottom or from bottom to top. This means they can either study the sector first and work themselves down to the company or vice versa. To make a stock rating, an analyst takes into consideration all the sections below:
Although the stocks can be scaled one to five, they can also be rated with words such as “sell,” “buy,” “hold,” “equal weight,” and “outperform,” to name a few. Here are a few of the most common rating and trading terms and what they mean.
Recommends short and long-term traders to purchase the stock. If analysts are optimistic about the stock growth, they may even recommend it as a “strong buy.”
This means the stock will trend downward in a particular time frame. An analyst might even rate stock as a “strong sell” if they feel pretty confident of their prediction.
Suggests investors should not buy or sell the specified stock, not because they are unsure, but because the stock will not grow or decrease significantly in the near future.
An analyst indicates that a stock is expected to perform below the market or sector average.
An analyst expects a stock to perform better than its competitors.
The stock’s performance will tie to the average of all the stocks that an analyst covers in a particular sector.
Analyst’s projection of a stock’s future price.