Stock analysts have been the guardian angels of trading, for as long as there have been stocks, for accurate stock market advice. An analyst's job is to make judgments on the quality of an investment product (most notably, stocks) and pass on expert stock market advice. They found more fame later, due to the flourish of round-the-clock stock market news and online resources. And with the influx of more and more stock analysts into the industry, their notoriety has also increased on their credibility over stock market advice. Stock analysts might come from the same school of learning; however, each one has a different outlook. Find one who matches your trading thought and look to them for stock market advice. On the TV channels some might tell you to sell stock X, and some other analyst on the same channel will want you to sell it. It’s extremely confusing! So look carefully before you leap is the best advice we can give here.
Report credibility is prime
To check the authenticity of the report, the first place you should check the fine print of any research report. That crucial information will reveal whether the report is authentic or biased to one entity. Based on that you can continue your research to arrive at the correct stock market advice.
Check for the analyst’s qualifications for stock market advice
An analyst's qualifications are important to determine if they’re qualified enough for the job. Typically, they would have pursued business-related studies for graduation and post-graduation. They’re usually entitled with professional designations like Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Find out which designation you need.
Select the right type of analyst for stock market advice
There are 3 types of analysts
Sell side analysts are the most public. They often work for broker dealers and disclose their recommendations to the company's clients, which often result in public disclosure.
Buy side analysts work for hedge funds, mutual funds investment and other institutional money managers, advising the firm's employees on what to buy, sell or hold.
Independent analysts do not work for banks or institutional clients. They sell their reports to investors.
Are their stock market advice biased?
When you go to a multi-brand dealership and ask the salesperson which brand of washing machine to buy and she immediately says, “Samsung”, there might be a bias.
In a similar fashion, if the analyst works for a bank hired to handle a specific IPO, that analyst will most probably speak positively about the IPO. And if the company is an incumbent client of the bank, the same bias may be projected.
Some analysts are paid through the revenue sharing model where the more money the firm makes, the higher is his cut. Hence, his stock market advice may be inclined towards the said client. A good rating for the client will obviously get more traction to his stocks and in return the analyst enjoys better commission.
An analyst may own stocks in the companies he covers or the firm that the analyst works for may own stocks in those companies. Either way, they would give positive stock market advice about the company so that they reap maximum benefits.
SEBI has taken steps to minimize conflicts of interest on stock market advice, but no amount of laws and regulations can eliminate analyst bias. However, these analysts are not corrupt. And this bias is not a trap you need to fall into. Simply focus on the points that seem to eliminate or at least reduce bias.
Numbers cannot be faked – Before delivering a stock market advice analysts arrive at their reports and recommendation by examining large amounts of data - earnings reports, balance sheets, peers performance comparison, the economic environment they're operating in and the numbers associated with that, and the stock's price, P/E ratio and other fundamental data. You can recommend your own specifications for the research.
Look at the charts: The technical analysts study the charts more than the fundamental data and arrive at short and long-term trends based primarily on that. They might identify key chart patterns that you did not see. This could be valuable information for traders.
Accurately predicting the future direction of any investment product or doling out a correct stock market advice is tough. While treating the analyst’s report as a bigger canvas, look into the finer details yourself before taking the stock market advice and investing.