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6 points to keep in mind while reading stock recommendations
Every investor comes across stock recommendations at some point in time or the other. This may be through your brokerage firm, business channels and websites, or even pink papers.
However, it may not always be easy to follow these recommendations. Some may even turn out to be conflicting. That said, stock recommendations can be pretty value and even unavoidable for some investors.
How, then, do you make sense of stock recommendations?
Here’s a cheat-sheet.
Understanding the rationale:
Before you decide to follow a stock recommendation, understand the reason behind it first. It’s easy to follow the numbers and advice blindly, but could be loss-making for your investments. For example, you could be a low-risk investor whereas the recommended stock has inherently higher risk.
Know the jargons:
Some stock recommendations give you direct ‘Buy’ or ‘Sell’ advice. Some, however, use words like ‘Outperform’, ‘Accumulate’ or ‘Hold’. Understand what these words mean. Outperform means the analyst expects the stock to give higher returns than the market. ‘Hold’ is for investors who have already invested in a stock. ‘Accumulate’ and ‘attractive’ translate to ‘Buy’. The meaning of these terms is often given at the end of the recommendation report. Ensure you read these without fail.
Target Price:
Every stock recommendation mentions the target price. This is the maximum price the stock is expected to reach before it starts falling in case of a BUY recommendation for example. You are likely to get the most profit from your investment if you sell the stock once it hits the target price. However, there is one key factor to consider while following the ‘Target Price’ – time.
Know the duration:
The time period for which you invest is of great importance. Whenever you follow a stock recommendation, ensure that it is for the same duration as your investment. For example, a stock could have a Target Price of Rs 100 for a 6-month period and also a TP of Rs 200 for a 2-year period. If you are a short-term investor, you may not hit the target of Rs 200 and end up getting lower profits.
Stop Loss:
So what if the market swings for some new development after the recommendation? Every analyst is aware that a recommendation can go wrong because of new factors. This is why a recommendation comes with a Stop Loss. This is the level at which you are supposed to exit your investment. You are essentially limiting your loss by selling at this price point. Even in this case, you should ensure your investment duration matches the time period of the stock recommendation. This is because long-term investors have the potential to accept stride bigger swings in prices without making a loss.
Check the validity:
Lastly, and most importantly, ensure the recommendation you are following still holds true to the current market scenario. Sometimes, all it takes is a single news or announcement to cause big swings in the market. This could affect the recommendations too. So, check with your broker if the recommendation has been updated to take into account the recent developments.
15%
Whenever an analyst gives a Buy or Sell rating, they expect the stock to give a certain percentage of returns. Kotak Securities gives a Buy rating when it expects the stock to deliver more than 15% returns over the next 12 months. It gives an ‘Add’ rating if they expect the stock give deliver 5-15% returns in the next 1 year. It gives a Sell rating only if the stock is likely to make a loss of over 5% over the same 1-year period.
