How Should Investors Read ‘Stock Rating' By Brokerages And Analysts?

Brokerages and analysts place investors' interest as secondary saying this we imply that onus is entirely on us as traders and investors in the market to find out the best source to rely on when a handful of such research reports giving recommendations and stock rating are available by well-known brokerages and analysts. This is because they cannot always be right and cannot always be wrong.

What makes up the research report of a stock?

The different ratings which are a measure of the stocks' future performance and are assigned by analyst include

1. Buy
2. Hold
3. Sell
4. Outperform
5. Equal weight
6. Underperform

Targeted price taking into consideration the different factors are put across by the brokerages with a certain timeframe in mind and this is in fact the fair value they picturise for a stock with respect to the market price. Plus to acquaint the investors, the particular stock rating is backed by reasons in their support.

Notably, such ratings assigned by renowned names, even give a direction to a particular stock. Say, in case of a downgrade, the stock may fell significantly in price plus its demand may reduce significantly.

At times, even despite the worst situation at hand, brokerages shy away from assigning a 'sell' rating to a stock as they fear to spoil to rapport with a particular rapport.

So, important points to note when taking cues from stock rating

1. Your investment horizon should be the key focus and in case you have a long term horizon in mind for a particular stock and the fundamentals are sound, you don't need to be bogged down by such stock ratings.

2. Do take into account the strategy adopted by the analysts to give in the rating i.e whether he has given rating based on relative or absolute returns. Better it will be to go by absolute returns over the time horizon.In case, when analysts have a 'buy' or 'overweight' call, there is a possible 10-15% upside in the stock price. On the other hand, a 'hold' or an 'equal-weight' call suggests timing the buy side in the stock. 'Sell' or 'under-performance' rating similarly indicates a bottoming in the stock price by the same amount of 10-15% unless something major happens.

3. So, as a prudent call, while these stock ratings and research reports can give you a general idea of the several policy changes and other triggers that can impact the sector or a particular stock, always use your personal judgment together with your risk element and horizon to take the final call.