In the stock market, complex techniques are used and many participants take part, including investors, market makers, traders, hedgers, speculators, financial experts and analysts.
In the stock market world, analysts who research companies are among the most respected figures.
They earn their living by predicting what will happen with the company in the future.
Analyzing historical data and current market trends, and creating models to predict future performance, stock analysts research companies or specific industries.
Through a stock rating, analysts express their opinion of a stock’s future performance.
Our goal in this article is to explain how traders can use different types of analyst ratings.
What is a stock rating?
A stock rating indicates the expected performance of a stock over a certain period. Ratings are often used by analysts and brokerage firms when recommending stocks to traders.
In addition to researching various companies’ public financial statements, analysts speak with executives and customers or listen to conference calls to arrive at stock ratings.
Ratings are typically issued every three months by analysts.
Types of Analyst Stock Ratings
In addition to simple “buy” and “sell” ratings, analysts can also assign “equal weight” and “outperform” ratings to stocks.
Here is a look at how analysts rate stocks.
Stocks with a “buy” rating are recommended for purchase. Traders should consider buying this stock if the analyst anticipates that its price will rise in the short to medium term.
Stocks can also be called “strong buys” if analysts believe they will outperform the market at large or within their industry.
A stock with current near-term catalysts, such as profitability or new products/service launches, can be rated a strong buy.
It is common for buy ratings to be accompanied by highly optimistic price targets, such as a 40% or 50% increase over the next five months.
Analysts give a “sell” rating to stocks when they believe they will underperform the market.
In the short to medium term, an analyst who issues a sell rating expects a stock’s price to fall below its current levels. A major challenge has also been identified in the company by the analyst.
However, most analysts do not rate a stock as a “sell,” even if they believe it should be rated as a “sell.”
Hold ratings tell stock traders not to sell or buy more stock.
This rating is usually given when analysts believe a stock will perform similarly to comparable companies in a particular sector or should perform similarly to the market.
Hold ratings are considered better than sell ratings, but not better than buy ratings. A trader with a long position should not sell, but a trader with no position should enter the market.
Hold ratings are often given by analysts when there is uncertainty about a company’s quarterly financial reports, new products/services, or future plans.
Hold ratings are given when analysts are unsure whether a company will meet its guidance, but it is still posting strong profits.
A “underperform” rating indicates the analyst expects the stock to perform worse than the index or the overall market. Traders should avoid stocks that analysts expect to deliver inferior returns, or an underperform rating.
In the case of a stock with a 4% total return and the S&P 500 Index with a 9% total return, the stock has underperformed the index by five percentage points.
This rating is bearish, and is sometimes referred to as “weak hold,” “underweight,” and “medium sell.”
Analysts assign an “outperform” rating when they expect higher returns for the benchmark index or the whole market.
An analyst assigns this rating to a stock when they expect it to outperform the index or the overall market.
When a stock’s total return is 9%, and the S&P 500’s total return is 6%, the stock outperforms the index by three percentage points.
This rating is considered bullish and is sometimes equated to “overweight”, “moderate buy”, “accumulate” and “market outperform”.
“Equal-weight” ratings indicate that the analysts believe the stock will perform similarly to the average of all stocks in a given sector.
Investors can use this type of rating to compare stocks within a particular industry or sector.
The pros and cons of using analyzers
There are advantages and disadvantages to using analyst ratings to analyze financial instruments.
The pros and cons of analyst ratings are therefore important for stock traders and investors.
Disadvantages of analyst ratings
- Incompatible: Analyst ratings change over time and are not always accurate in predicting stock movements.
- Inadequate when used alone: A trader cannot rely solely on analyst ratings to determine whether to sell, buy, or hold a particular stock. When deciding whether to hold a particular stock, a trader must also consider other factors.