In a nutshell, a stock rating is a measurement of the asset’s anticipated performance given by an experienced analyst. Generally speaking, there are three possibilities for an analyst stock rating — buy, sell, or hold. Meanwhile, it’s also possible to have an underweight, equal weight, and overweight analyst rating.
Do you want to know more about how an analyst rating works? Curious about the analyst ratings meaning? Read on and learn from the insights we’ll share in this quick guide.
How Do Analysts Rate Stocks?
It isn’t a simple guessing game. Analysts ratings are a result of thorough studies that consider a plethora of variables. Hence, you can be confident that the ratings will indeed be valuable in your trading decisions.
Stock analyst recommendations have two general categories. The first is fundamental analysis, which uses data sources. They will look at the financial statements, which can provide an idea of the company’s health.
In addition, analysts will look at recent news about the company, as well as its plans. If it looks like the business has good plans that could potentially be profitable, then the analysts can provide favorable recommendations.
Fundamental analysis helps in the evaluation of profitability, growth trajectory, liquidity, and solvency, among others.
Meanwhile, the second category in analyst ratings stock can also result from the use of various technical indicators. It uses past and present price action to predict future price movements, and that’s exactly what we’ll be talking about in the next section.
What Are the Best Technical Analysis Indicators for Analysts?
Now that you know about analyst ratings meaning, let’s briefly talk about the different technical indicators that are used.
It’s almost impossible to talk about technical analysis indicators without mentioning moving averages. An analyst on stock market can provide a recommendation like Buy Stock X as long as its price remains above the 20-day exponential moving average.
Note that there are two types of moving averages. The first is a simple moving average. It calculates the average price of the stock within the last period (such as 20 days).
Meanwhile, the second type is an exponential moving average. The main difference is that it puts more weight on recent data. Therefore, it’s more timely.
As the name implies, it will give an idea about the momentum. It evaluates a stock price’s strengths and weaknesses, measuring how much it rises and falls. According to experts, using momentum indicators is more accurate in rising than falling markets.
You’ll find different types of momentum indicators, and one of the most popular is the moving average convergence-divergence. This will result in creating a signal line, which will then be the basis of buy or sell ratings.
Looking at flag patterns is another way to come up with analyst rating stocks. They can show trend reversals and breakouts following a consolidation. Bear and bull flag technical analysis can show both bullish and bearish sentiments.
Why Do Analysts Give Buy Ratings on Stocks?
There are different reasons for analyst stocks to buy recommendation. Among others, one possibility is that the company has a strong financial performance. The numbers might be favorable for the business, so analysts believe in its strong market performance.
Further, the presence of a strong management team is also a potential reason for buy analyst stock ratings. This means that analysts believe in the people behind the company. They can steer the growth of the business to influence the better performance of its stocks.
As earlier mentioned, analysts might also look at technical indicators. If these indicators are favorable, then the analysts will recommend buying a specific stock. In most cases, more than one technical indicator will be used.
More so, buy analyst stock ratings may not only be associated with the company but the industry in general. For example, analysts might suggest buying stocks from industries they expect to experience significant growth.
How to Interpret Analyst Stock Ratings
For better insights on analyst stock ratings definitions, let’s also talk about how you can interpret them. This way, you can make the most of the available insights.
In most cases, you’ll find three analyst ratings stocks. The meanings are also pretty self-explanatory.
- Buy: Within the short to medium term, analysts are expecting the price of a stock to rise. Hence, they are issuing analyst buy ratings. It can also be expressed as Strong Buy.
- Sell: Experts are expecting the value of the stock to rise within the short to medium term. You can also find this rating as Strong Sell.
- Hold: This rating means that the analysts are not expecting any significant change compared to the past performance.
More so, stocks and options technical analysis can also have ratings based on how a company is expected to perform. It looks at the potential impact of the competition.
- Under-Perform: The performance of the company can be worse than the market average. You can see it as a red flag, which means that you should avoid the stock.
- Outperform: An analyst rating outperform means that it’s anticipated that the company’s performance will be better than its peers. This favorable projection could translate into a buy recommendation.
Lastly, you can also see overweight or underweight as recommendations. Generally speaking, overweight is similar to outperform, which is a recommendation to buy. Meanwhile, underweight is the same as under-perform.
What Is the Importance of Analyst Recommendations in the Stock Market?
Wrapping up this guide on analyst ratings explained, let’s discuss why these ratings are important. Well, it’s crucial for beginners in the stock market. You don’t need to manually go through the fundamental and technical analysis of different stocks.
Analystratings will simplify your research. The experts are the ones putting in the work for you. Nonetheless, it pays to still do your research, so you can invest wisely.