One of the most important aspects of trading equities is identifying catalysts that could trigger a stock to move strongly in one direction or another, especially in a short period of time. Anything that has the potential to move a stock—from earnings reports to technical setups—can be considered a catalyst.
But there is one catalyst that institutional investors pay very close attention to and can cause volatility in stocks on any given day: analyst ratings.
Institutions across Wall Street employ analysts that do research for every asset class, from real estate to equities. These analysts are Chartered Financial Analysts who are paid to offer investing opinions that are supported by in-depth research and financial models.
The analysts we’re referring to here are known as “sell-side” analysts. They work for investment banks, independent research firms, and anybody else who “sells” research to institutional investors, such as hedge funds, banks, or someone actually making investments.
This is not the same as “buy-side” analysts, who produce research to support preconceived investment ideas.
An analyst’s work results in research reports that are distributed to clients in the pre-market and after-hours sessions.
These Wall Street CFAs are responsible for periodically assessing all the stocks they cover and putting together in-depth reports on the financial well-being of the companies. Clients of these investment banks pay big money to have access to these reports before anyone else. The standard analyst report includes detailed commentary about a company, insights from access to company leadership, and analysis about a stock’s valuation. Almost all analysts include a rating and 12-month price target in each of their reports.
While these reports are ultimately opinions, the best analyst reports are unique and compel people to make trading decisions based off them. Oftentimes, these reports get distributed or leaked to the media, who then publicize what they say. An analyst may also give interviews to elaborate on their research.
Analyst reports can typically be dozens of pages, but the highlights are the rating and price target. Typically there are three ratings tiers for stocks: “buy,” “hold” and “sell.” Some analysts use alternate terminology, such as “outperform” instead of “buy” or “underweight” instead of “sell,” but most analysts conform to the three-tier system.
In addition to the rating, analysts typically release a price target, which is the price they expect the stock to be at 12 months in the future.
Changes in analyst ratings and new initiations (when an analyst starts covering a stock for the first time) are some of the biggest short-term catalysts for stocks. Analysts have the power to move markets by themselves, and this is especially true for the most influential equity analysts on Wall Street. A single upgrade or downgrade from an analyst at one of Wall Street’s largest institutions, such as Goldman Sachs, JP Morgan, and Bank Of America, can be the catalyst to jumpstart a stock higher or bury it lower.
The smart money is reading analyst research every morning, so it’s important for other traders and investors to at least know what the analysts are saying about their stock. You can see the ratings from over 4,000 Wall Street analysts by opening a Lightspeed account.
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