July 25, 2014

Broker Recommendations Explained

When researching shares, you will often see a number of varying broker recommendations. This guide will explain the differences between different broker recommendations.

Buy

A buy recommendation reveals that a particular broker has strong optimism in the future prospects of a share and it may constitute a good purchase based solely on their opinion. However, brokers generally seem more inclined to issue more buy ratings than sell ratings.

Outperform/Overweight

A rating of this nature indicates that the broker expects the particular share to perform better than its peer group, and is therefore worthy of holding in a portfolio.

Hold/Fair Value

This generally means that a broker believes that the current share price of a particular company is fairly valued, and is effectively in a neutral position.

Underperform/Underweight

A rating of this nature indicates that the broker believes that the share will fall below the performance of its peers; therefore it is highlighting a negative outlook on the prospects of the share.

Sell/Avoid

Brokers will issue a sell rating on shares that they believe are expected to strongly experience poor performance in comparison to their peers. When brokers initiate such a recommendation, it can cause a fall in the share price.

Listening to Broker Recommendations?

Listening to broker recommendations can help you gain further insight into a stock, but it should be by no means your sole source when picking a share to buy. There is no substitute to doing your own research, and a broker recommendation could form just a small part of your research. But remember, if brokers recommendations were always right, then all investors would be very rich with virtually no effort…