Sometimes, when people come into a lot of money, they do more with it than purchase and consume. They invest that money in places where it will grow over time, mostly in the stock market.
Yet, stock markets can be confusing labyrinths of financial jargon and needlessly pricey advisors. It’s easy to get lost in the tomes of analyst ratings surrounding a stock, and with so many of them out there, it can be tough to know which to trust. Even worse, they can be impossible to understand.
Yet, it’s easy to know how to tell trustworthy analyst ratings from disingenuous ones. It’s even easier to learn how to read them like an expert, as long as you do the right research! If you’re willing to put in the work to learn about the stock market so that you can invest your money wisely, you’ll see profits in no time.
Keep reading below to learn more about how brokerages arrive at their analyst ratings, and what they even mean.
Analyst Ratings Consider More than Stock Prices
Most people assume that analysts only look at price fluctuations and try to identify patterns in the way stocks change over time. And generally speaking, this is exactly what market analysts do. Yet, it’s also a lot more complicated than that.
First, analysts look at the performance of the economy as a whole. This provides the basis for future research and will guide them as they try to figure out whether a particular stock is worth investing in. Then, they will investigate the performance of the stock’s industry as a whole.
Many things can affect an entire industry, such as trade wars and natural disasters. If one of these things occurs, stock prices will start to fall and analysts will generally recommend selling.
And if an industry is performing well, analysts will start to research the performance of the individual company. They will be able to make specific determinations about whether people should invest in it or not.
Ratings Are Usually Revealed As Scores or Stars
Most of the time, brokerages release analyst ratings on a scale between one and five. A rating of one usually means that people should absolutely sell the stock and that the brokerage isn’t confident in its ability to succeed at all. At the end of the scale, a rating of five means that people should buy a particular stock since the analyst is confident in the company.
Things can get complicated in between the extremes of the scale. At some brokerages, a rating of two can mean that people should simply consider selling soon. It means that the stock is underperforming, and may continue to underperform.
Yet, a rating a four can mean that people should hold onto a stock if they already have it, but new investors may want to wait to strike. It can mean that the company may start out-performing the analyst’s expectations. Even though a five-point rating scale may seem simple, it can mean many different things!
Rating Terminology Can Confuse Casual Investors
Alongside average rating scales, analysts usually describe stocks using complex financial jargon. And that’s if analysts decide to use English at all to describe a stock. Most of the time, they will try to explain why you should or shouldn’t invest in something using complex financial documents and complex, business-related numbers.
It can all be overwhelming, yet with enough research, you will get the hand of financial jargon! And when you can speak the same language as analysts, you can identify an analyst rating you can trust!
There Are Several Kinds of Analyst Ratings
The lexicon of financial advisors is thick with more than just business and accounting records. The words that financial advisors use don’t always mean exactly what they seem like they should. And when the meanings of words change, new investors often get confused.
Luckily, it’s easy to stay on the same track as market analysts. Just keep reading below to learn what investing terms mean, and how they can impact your stocks!
Overweight Stocks Aren’t Stocks That Need to Hit the Gym
Sometimes, you may hear that a stock is ‘overweight.’ This doesn’t mean that the company should organize an exercise program for its employees. In fact, it’s good for a stock to be overweight.
This means that analysts expect the stock to start out-performing their expectations and that investors will start making money off of it. An overweight stock has lots of potential to make money, even if it isn’t reaping in massive dividends yet. Invest in overweight stocks to make your portfolio fit and strong!
Sell! Sell! Sell! Sell Ratings Are Worth Listening to
If analysts are crying out that people should sell a particular stock, you should listen to them. Declaring that people should sell a stock means there’s still time to make money off of it, as long as you get rid of it now. Holding onto it longer can have dangerous consequences.
A ‘sell’ rating means that the company is about to lose a lot of money and that the stock price is about to fall. Yet, it also means there’s still time to recoup on your losses if you just get rid of it.
Hold the (Financial) Line With Hold Stocks
Hold orders frequently show up throughout the market, and they’re simple things to understand. A hold rating is like a battle order: hold the line! If you own a stock that has a hold rating on it, then you and your fellow investors can still save the company.
Assigning a hold rating means that the company is struggling, but that it still has the strength to get through it. All you need to do is hold on during the ride.
Markets Can be Merciless — Don’t Go in Alone
New investors usually take advantage of apps like Robinhood or Acorns that give them full control over their portfolios. And while that may sound appealing to some, the markets can be merciless. It’s easy to lose everything in them, and so you should never try to navigate them alone!
Yet, knowing which analysts to trust can be challenging. And understanding the things they say about specific stocks can feel like trying to speak another language. But it’s also an easy language to learn — you just need someone to teach it to you.
For that, we’re here. Keep reading our website to learn more about the stock market, and how you can succeed in it!