Financial analysts research and analyze companies
that have issued stock and make recommendations to buy, sell,
or hold specific securities. When a well-respected analyst upgrades
or downgrades a stock, it often has an immediate impact on the
stock's price as investors rush to follow the recommendation.
A numbers game
Analysts focus heavily on stock
volatility.
Some analysts measure the volatility by comparing changes in a
stock's price to the average price changes of a control group
of stocks. The relationship is called the stock's
beta
— set at a base, or co-efficient, of 1. The higher a stock's
beta, the more you can expect its value to fluctuate. For example,
a beta of 1.8 is more volatile than the market as a whole, and
a stock with a beta of 0.8 is less volatile. According to analysts'
predictions, a stock with a beta of 1.8 would rise to 18% if the
market went up 10%, and fall 18% if the market fell 10%.
If you're interested in what the experts
are saying about a stock, you might want to start with analysts
who work for independent research firms that evaluate stock performance
or those who are unaffiliated with a financial institution, such
as a mutual fund company, brokerage firm, or investment bank.
These analysts are not vulnerable to the same types of criticism
that are sometimes leveled against analysts who work for financial
institutions offering stock for sale or acting as advisers to
companies that issue stock.
Many analysts use a scale of
Buy, Sell, and Hold to rate stocks — although
the Sell recommendation has rarely, if ever, been
invoked in recent years even if the outlook for a
stock is grim. Rather than rely on the ratings, which
only tell part of the story, you may get a more detailed
and accurate indication of the company's prospects
if you read the analyst's entire report.
