Explainer · Earnings & Analyst Ratings
Analyst ratings and price targets explained
Stock pages often show a row of buy, hold and sell ratings and an average price target. Here is who produces them, what the rules require them to disclose and why they are a starting point, not an answer.
Quick answer
An analyst rating is a research analyst's recommendation on a stock, such as buy, hold or sell, and a price target is the share price the analyst estimates the stock could reach. Terms differ between firms, and the SEC says not to rely solely on them [1].
Key points
- Sell-side analysts typically work for broker-dealers; buy-side analysts typically work for money managers [1].
- The same word, such as buy, can mean different things at different firms [1], so read each firm's definition.
- FINRA rules require a price target to have a reasonable basis and an explanation of the valuation method [2].
- Research reports must disclose conflicts such as owning 1% or more of the company or recent investment banking pay [2].
- An average price target hides how far apart the individual targets are (calculated in the example below).
On this page
What is an analyst rating?#
Research analysts study publicly traded companies and make recommendations on their securities [1]. The SEC separates them into two groups. Sell-side analysts typically work for full-service broker-dealers and publish recommendations on the stocks they cover. Buy-side analysts typically work for institutional money managers that buy securities for their own accounts [1].
A rating is a short label for the analyst's view. The SEC notes that analysts use a variety of terms, such as buy, strong buy, or near-term and long-term accumulate, and that the meanings of these terms can differ from firm to firm [1]. FINRA Rule 2241 deals with this by requiring a firm that uses a rating system to define each rating in each research report, including the time horizon and any benchmark the rating is based on [2].
What is a price target?#
A price target is the share price an analyst estimates the stock could reach. FINRA Rule 2241 requires firms to have procedures so that any recommendation, rating or price target has a reasonable basis, comes with a clear explanation of the valuation method used and a fair presentation of the risks [2]. Once a firm has assigned a rating or price target for at least one year, a report that includes one must also show a line graph of the stock's daily closing prices for the period the firm has rated it, or three years, whichever is shorter, with the dates each rating or target was assigned or changed [3]. That chart lets you see how earlier targets compared with what the price actually did.
Why can analyst ratings be biased?#
The SEC lists several conflicts of interest that can pull a sell-side analyst toward a positive view [1].
- Investment banking. When the analyst's firm helps a company sell shares, the firm has a substantial interest in that offering being successful.
- Brokerage commissions. A positive-sounding report can help a firm make money indirectly by generating more purchases and sales.
- Ownership. The analyst and the firm may own significant positions in the companies the analyst covers.
These are not theoretical. On April 28, 2003, the SEC announced that ten of the largest investment firms had settled enforcement actions over conflicts between research and investment banking, with total payments of roughly $1.4 billion [4]. The firms had to physically separate research from investment banking, analysts' pay could no longer be based on investment banking revenues, and analysts were barred from pitches and roadshows to win banking business [4].
Today each sell-side report must also carry a certification from the analyst that the views accurately reflect the analyst's personal views, and a statement on whether the analyst's pay is tied to the specific recommendation [5]. A certification is a disclosure. It does not make the rating correct.
What must a research report disclose?#
If you can read the full report, the disclosures are often more useful than the rating. These are the main ones the rules require.
| Disclosure | What it tells you |
|---|---|
| Meaning of each rating | The time horizon and benchmark behind buy, hold or sell |
| Rating distribution | The share of all rated stocks the firm rates buy, hold or sell |
| Price and rating chart | Daily closes with rating and target dates, up to three years, once rated for a year |
| Ownership of 1% or more | Whether the firm or affiliates own 1% or more of a share class |
| Investment banking pay | Whether the firm was paid for banking work in the past 12 months |
| Analyst certification | That the views are the analyst's own, and whether pay is linked |
FINRA Rule 2241 rating definitions, distribution, ownership and banking disclosures [2]; price chart [3]; analyst certification under SEC Regulation AC [5].
The rating distribution is worth a close look. Rule 2241 requires a report with a rating to show the percentage of all securities the firm rates buy, hold or sell [2]. If almost everything a firm covers is rated buy, a buy from that firm tells you less.
How do you read a consensus rating on a stock page?#
Stock pages may combine many analysts into one summary: a count of buy, hold and sell ratings and an average price target. The same idea is used for earnings: FINRA describes the consensus estimate as the average for all the analysts covering a stock [6]. Averages are convenient, but they can hide a wide spread of views, as the example below shows.
- Ratings
- 6 buy, 3 hold, 1 sellhypothetical inputs; 60%, 30% and 10% calculated
- Average price target
- $104.40mean of ten hypothetical targets, calculated
- Lowest and highest
- $85 to $125+6.25% to +56.25% from $80, calculated
- Median target
- $102calculated
The average target implies a 30.5% rise from $80 (calculated), but the individual targets run from 6.25% to 56.25% above the price (calculated). Different analysts can update on different dates, so an average can mix fresh and stale views. A summary also drops each firm's rating definitions, which, as above, can differ from firm to firm [1].
How should a beginner use analyst ratings?#
The SEC's advice is direct: investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold or sell a stock, and should do their own research [1]. Regulation FD also limits private tips: if a company discloses material nonpublic information to people such as brokers or investment advisers, it must make the same information public [7].
- Read the firm's rating definition
Find what buy or hold means at that firm, and over what time horizon [2].
- Check the disclosures
Look for ownership of 1% or more and recent investment banking pay from the company [2].
- Look at the spread, not just the average
Compare the lowest and highest targets with the current price.
- Go to the filings
Compare the analyst's story with what the company itself reported. Our guide on how to read an earnings report shows where to start, and SEC filings explained covers the 10-K and 10-Q.
Mistakes beginners make with analyst ratings#
- Treating a price target as a forecast that will come true
A target is an estimate built on assumptions. The rules require a reasonable basis and a valuation explanation [2], not accuracy.
- Comparing ratings across firms as if they meant the same
A buy at one firm and a buy at another can mean different things [1].
- Ignoring conflicts of interest
Banking relationships, trading commissions and ownership can all push toward a positive view [1]. Read the disclosures.
- Relying on the average alone
An average target can hide targets far above and far below it. Look at the range.
- Using ratings instead of your own research
The SEC says not to rely solely on an analyst's recommendation [1]. Ratings are an input, and stocks can lose value whatever the rating.
Frequently asked questions#
What is the difference between a buy rating and a price target?
A rating is the analyst's recommendation label, such as buy, hold or sell. A price target is the specific price the analyst expects, with a valuation method that FINRA rules require the report to explain [2].
Are analyst ratings regulated?
Who pays for analyst research?
Sell-side analysts typically work for broker-dealers, and the SEC notes that positive reports can help those firms indirectly by generating trading [1]. That is one reason to read the conflict disclosures.
Does ChartWise publish ratings or price targets?
No. We explain how ratings work, but we do not rate stocks, set price targets or tell anyone to buy, hold or sell.
The bottom line#
Analyst ratings and price targets are opinions from people who study companies closely, and some of them face real conflicts of interest. Read each firm's rating definition, check the ownership and banking disclosures, look at the full range of targets rather than the average, and then go back to the company's own filings. The SEC's advice sums it up: do not rely solely on an analyst's recommendation [1].
Sources
- Analyzing Analyst Recommendations.
- 2241. Research Analysts and Research Reports.
- SEC Approves Consolidated Rule to Address Conflicts of Interest Relating to the Publication and Distribution of Equity Research Reports (Regulatory Notice 15-30).
- Ten of Nation's Top Investment Firms Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking.
- 17 CFR 242.501 Certifications in connection with research reports.
- What Is Earnings Season?.
- 17 CFR Part 243 Regulation FD.
Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.
