ANALYZING ANALYST RECOMMENDATIONS

Research analysts study publicly traded companies and make recommendations on the securities of those companies. Most specialize in a particular industry or sector of the economy.  Analysts' recommendations or reports can influence the price of a company's stock, especially when the recommendations are widely disseminated. The mere mention of a company by a popular analyst can temporarily cause its stock to rise or fall.

Analysts often use a variety of terms—buy, strong buy, near-term or long-term accumulate, near-term or long-term over-perform or under-perform, neutral, hold—to describe their recommendations. But the meanings of these terms can differ from firm to firm. Rather than make assumptions, investors should carefully read the definitions of all ratings used in each research report.  While analysts provide an important source of information in today's markets, investors should understand the potential conflicts of interest analysts might face. For example, some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover.

Investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock. Instead, they should also do their own research to confirm whether a particular investment is appropriate for them. 

WHO ANALYSTS ARE AND WHO THEY WORK FOR

Analysts historically have served an important role, promoting the efficiency of our markets by ferreting out facts and offering valuable insights on companies and industry trends. Analysts generally fall into one of three categories:

Sell-side 
Analysts typically work for full-service broker-dealers and make recommendations on the securities they cover. Many of the more popular sell-side analysts work for brokerage firms that provide investment banking services for corporate clients, including companies whose securities the analysts cover.

Buy-side 
Analysts typically work for institutional money managers such as mutual funds, hedge funds, or investment advisers that purchase securities for their own accounts. They counsel their employers on which securities to buy, hold, or sell and stand to make money when they make good calls.

Independent 
Analysts typically aren't associated with firms that underwrite the securities they cover. They often sell their research reports on a subscription or other basis. Some firms that have discontinued their investment banking operations now market themselves as more independent than multi-service firms, emphasizing their lack of conflicts of interest.

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