Analysts are quite influential in the stock market because every day, you see stocks go up and down based on their calls. When a stock gets downgraded by an analyst, it often goes down that day. The reverse is true for when an analyst upgrades a stock – it often has a good day.
But who are these analysts and why do they have so many different rating systems?
The online discount brokers don’t have analysts that I am aware of. I’ve never seen an upgrade or downgrade made by someone from E*Trade, TradeKing, Scottrade, or any of the other online brokers. That makes sense because when you put your money in any discount broker account, you won’t get any personal service, advice, or hand holding. Its just you making the decisions about what stocks to buy and sell on your computer with no help from any advisor.
The analysts come from the full service brokers and a host of other financial institutions. Some of these analysts are better known than others and have more influence. In other words, they are not all equal in terms of credibility. Better known analysts will often move a stock more than other less known ones, perhaps because they have better track records and have been around longer.
The recommendation ratings these analysts use though, are all over the board and not uniform. They may differ from each financial institution and can mean slightly different things even when the terms themselves are the same. For me, a simple buy, sell, or hold will do. After all, those are the only three things I want to know about. But here are some of the many ratings you might see when analysts are giving their opinion of a stock:
Long Term Attractive
As I mentioned, each of these rating could mean slightly different things depending what financial institution is using them. A “buy” from one analyst may mean an expected upside of 20% or more in the next year while another may use “buy” to mean only 10% in the next year.
Just realize that if you are going to understand any rating completely, you need to do some research to find what the financial institution or analyst means when they use it. And after you do understand what the intent is of the rating, remember to take everything with a grain of salt as stock recommendations and ratings are just an opinion and can be totally wrong as seen in the instance below: