Why you should not blindly follow the advice of stock market analysts!
Analyses of investment strategies appear in the media every day. However, the advice of stock market analysts does not always guarantee a good return because they are sometimes not impartial.
Financial institutions pay analysts to encourage investors to invest in certain stocks. The transactions they recommend earn commissions to financial institutions, but are not always in the investor's best interest. However, we should not generalise: sometimes advice is quite useful and interesting for the investor. It is mainly the credibility of the stock market advisor that counts: does he have a reputation for acting impartially? Or is he perhaps too guided by the interests of the financial institution that pays him?
Stock market advice
As a newbie investor, it is sometimes confusing to read that in addition to "buy", "hold" and "sell" there are many other signals used by stock market analysts:
- "Buy" is general buying advice, while "Strong Buy" is the strongest buying advice a stock market analyst can give.
- "Outperform" is better than "Buy" but less pronounced than "Strong Buy" and is given to stocks that are expected to outperform other companies in the same industry.
- "Underweight" is negative. This advice is given for stocks that are expected to underperform the industry average.
- In "Neutral", "Hold" and "Market Perform", the stocks perform in line with the market. In other words, the stock in question will not fare better or worse than other stocks in the same industry or region. A "Hold"advice means that someone who owns the stock should not sell it, but someone who does not yet have a position in it should not buy it either.
- "Overweight" is a positive signal, but not as strong as "Outperform". It means that the analyst expects the stock in question to outperform the market.
- "Underperform" lies between "Hold" and "Sell" and indicates that the analyst expects the stocks to underperform other companies in the same industry.
- "Sell" is a general sales advice, while "Strong Sell" is the strongest sales advice. A "Strong Sell" is only given if the stock market analyst expects negative news in the short term or if the company in question is dealing with unexpected negative developments.
When should you not listen to analysts?
While you should always take the advice of stock market analysts with a grain of salt, you need to be extra critical in turbulent financial times. The advice of a stock market analyst primarily relates to the evaluation of a specific stock. He evaluates this share on the basis of his estimate of future earnings development, the market in which the company operates, the debt ratio... But what an analyst does not take into account is the general stock market climate. In 2007 and 2008, for example, many stocks were still given strong buying advice, while the stock market climate deteriorated systematically and eventually ended in a real crash.
In times of crisis, independent stock market advice that takes into account not only individual stock valuations but also the general economic outlook is crucial for investors. By avoiding significant losses - which fortunately only occur sporadically - you create significant capital gains in the long term.
Independent stock exchange information from us
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