How to Interpret Basic Investment Recommendations from Stock Brokers
In recent years, investment-conscious Americans have become enamored with a new sport: the rating of stocks by brokers on TV financial shows. Frequently, these shows feature a dapper market strategist talking up a particular stock.
Some stocks have been known to jump significantly right after an influential analyst issues a buy recommendation. Analysts’ speculation and opinions make for great fun, and many people take their views very seriously. However, most investors should be very wary when analysts, especially the glib ones on TV, make a recommendation. It’s often just showbiz.
Brokers issue their recommendations (advice) as a general idea of how much regard they have for a particular stock. The following list presents the basic recommendations (or ratings) and what they mean to you:
Strong buy and buy: Hot diggity dog! These ratings are the ones to get. The analyst loves this pick, and you would be very wise to get a bunch of shares. The thing to keep in mind, however, is that buy recommendations are probably the most common because (let’s face it) brokers sell stocks.
Accumulate and market perform: An analyst who issues these types of recommendations is positive, yet unexcited, about the pick. This rating is akin to asking a friend whether he likes your new suit and getting the response “It’s nice” in a monotone voice. It’s a polite reply, but you wish his opinion had been more definitive.
Hold or neutral: Analysts use this language when their backs are to the wall, but they still don’t want to say, “Sell that loser!” In this case, the rating is the analyst’s way of keeping his mouth shut.
Sell: Many analysts should have issued this recommendation during the bear markets of 2000–2002 and 2008 but didn’t. What a shame. So many investors lost money because some analysts were too nice (or biased?) or just afraid to be honest, sound the alarm, and urge people to sell.