Take an Analyst Rating with a Grain of Salt

Looking at an analyst rating is a popular way to decide whether an investor should buy a particular stock. Even though analyst ratings can provide some value, you will want to temper your expectations of these ratings. These ratings are created by stock analysts that spend a great deal of time looking at the market and certain companies.

Analysts

There are two different types of analysts that come up with ratings. There are "buy side" and "sell side" analysts. Sell side analysts are employed by companies that sell securities. Buy side analysts are employed by investment companies that want to know which investments to get involved with. When you are looking at a recommendation, you should pay attention to who the analyst is working for. In most cases, analysts that work on the sell side want to recommend stock purchases. Since they are paid by customers purchasing stock from the company, they want to get you to buy as much stock as possible.

Analyst Ratings

Analyst ratings can sometimes be difficult to decipher. Sometimes, they will issue long, detailed reports that provide information about a particular stock. Other times, they will issue a short statement as to whether an investor should buy or sell. In some cases, they will issue statements such as buy, hold, accumulate or neutral. You have to closely examine the statements and reports that are generated by the analysts in order to get any type of value from them.

Subjective Reports

The big problem with blanket recommendations like this is that they do not take into consideration your individual situation. Listening to a generalized statement can cause you to make the wrong decision for your situation. When one person needs to sell quickly, another person might be better off buying. For example, you might have chosen a stock months before an analyst recommended buying it and realized a fantastic profit. You might be better off to sell now and take advantage of the upswing in the market instead of waiting until the price falls back down again later. 

Research

When you are looking at stock ratings, you should only include them as a piece of the puzzle. This should not be the only thing that you look at when you are trying to make an investment decision. Instead, you need to conduct a thorough amount of research on the investment itself instead of relying on someone else to do it for you. Many investors make the mistake of allowing a stock analyst to convince them of what they should be doing with their money. When you are investing money that you have worked hard to earn, you should not rely on anyone else to tell you what to do with it. Otherwise, you could end up losing a significant portion of your investment and you will not understand why. Take their advice with a grain of salt and realize that the world of the stock market is vast, make your own decisions.

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