Tuesday, August 31, 2010

Stock Analysts: Will it Pay To Stick to Their Ideas?

How does the stock market work? For many new investors, they will look for stock analysts along with their thoughts and opinions when trying to learn more. On the other hand, would it be the smartest move?

I've never actually fully understood why research analysts have the respect the stock market appear to offer them. For the last decade or so it's been a known fact that research analysts do not like to provide sell recommendations, since it could affect their firm's investment banking connection.

Ratings like Sector Underperform really do not shout to you to sell today. Yet each time a stock gets a Sector Outperform that has a projection of the price is going to be inside 12 months, the majority of analysts are off - yet the stock nevertheless pops on the first day of coverage. Hmmm, wonder how many shares the company has?

Research analysts prefer to move a recommendation from Outperform to Sector Perform - this helps make certain that when the firm's investment banking arm is seeking to help come up with a deal with the company, they could say hey, we did not suggest your company as a sell! Consequently you are not likely to have an impartial Sell recommendation.

Since 2002, the SEC has altered the guidelines a little that forces companies to report any kind of potential issues. Although they have been working hard on the apparent issues, has that altered anything?

How about the subtle conflicts?

Corporate management supplies information to analysts for instance earnings estimates plus the outlook to the corporation. Without having this cozy relationship in place, analysts can offer a heads up message to their subscribers. By initiating a sell rating, will corporate management be upset? Its a risk that not several analysts will take.

If a CIBC Wood Gundy analysts makes a purchase recommendation to CIBC clients, CIBC stands to make money from commissions as their customers act on the purchase recommendation.

Did you know that you will find well over 8000 stocks listed on US exchanges that receive no analyst coverage? Thats 8000 additional stocks where you are not going to obtain an unbiased sell recommendation.

A recent check with the Nasdaq 100 revealed that 84 stocks had a purchase recommendation, 15 had a maintain recommendation and 1 had a sell recommendation. In case you think now is really a great time to invest inside Nasdaq 100, consider that inside summer of 2008, before the largest drop inside stock marketplace since the 1930's, 82% with the Nasdaq 100 had been rated a purchase, 16 had been maintain and 2 had been a sell. Shouldn't these analysts who had been touting a purchase truly have been giving a sell rating?

Brokerage firms also like to muddy the waters with terms like Buy, Moderate Buy, Outperform, Accumulate, Overweight and Add, which are just "buy" recommendations. A sell rating (one that means get out of your positions inside stock), could include phrases like Hold, Neutral, Moderate Sell, Weak Hold, Reduce. To confuse points even additional, when a stock moves from Strong Buy to Buy, it truly suggests that you sell that stock.

This just makes it all the additional crucial for you to take control of your purchase decisions and set your personal sell criteria.This is how you learn how to sell stocks. From an % gain, % loss or trailing stop, develop your personal and stick to it. You'll do far better than waiting to the analysts to obtain it right.

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