Should You Be Listening to Stock Analysts?

A stock analyst is someone who evaluates companies and their stock to give you a better idea of market trends, and how stocks may perform in the near and distant future. These analysts focus on the earnings of a variety of companies – some of whom report their earnings monthly or quarterly. Analysts take time to estimate what kind of earnings stock holders can expect, how recently reported earnings impact stock, and how stock holders should be prepared to act after (or before) an earnings report is released based on how a company is doing.

What Do Stock Analysts Do?

Stock analysts have achieved notoriety within the investment world, but their popularity is recent. During both the collapse of the 1990 tech bubble and the 2008 financial crisis, people started looking to professionals to help them make unbiased decisions about their stock in the event of financial disaster. Before this, stock analysts existed, but the profession was incredibly biased. Analysts worked hand in hand with companies who were planning to go public, and often reviewed their stocks favorably even if it was an honestly bad investment.

Analysts as we know them today started to emerge after these market crashes to provide quality research on companies and their subsequent stock. Most analysts start as a research associate within financial firms, and the majority of them have a bachelor’s degree that qualifies them for the position. From there, analysts can expand their career by mentoring with senior staff members and focusing on writing recommendations, completing equity research, and compiling reports.

There are two kinds of analysts – buy and sell-side. Both types of analyst work to evaluate stocks and the companies behind them, but there are a few key differences. Sell-side analysts focusing on accessing information and getting a general idea about each stock or fund. Buy-side analysts focus on being precisely right or wrong. However, they both fill similar roles. Many newer analysts are fee-based, which means that investors pay money for their research, not companies. This ensures that analysts aren’t getting a kickback from public corporations looking to gain a favorable analysis of their stock.

Should You Subscribe to Analyst Magazines?

Subscribing to top-notch analyst magazines can help you to get a better understanding of current stocks on the market, how they’re performing, and overall trends. Stock analysts publish their reports and findings here, and it can be useful to read several different opinions and form your own ideas. Reading the ideas of people who have been specially trained to analyze companies, their earnings, and their stock’s performance can help you to bolster your knowledge.

The more you educate yourself on the opinions of these professional analysts, the more you’ll be able to improve your own investment strategy. Focusing specifically on the opinions of analysts who evaluate specific business sectors can also be useful, because their information is going to be more targeted.

Just remember – take everything you read with a grain of salt. Although there is some regulation that goes on among stock analysts, it’s difficult to know if they’re being 100% unbiased. For example, many buy-side analysts have some interest in the stock they’re evaluating because they’re employed by a mutual fund or investment management company. On the other hand, sell-side analysts often have close relationships with the companies they evaluate – which might influence their decision. However, it’s generally accepted that sell-side analysts will be less bias because they aren’t directly employed by a mutual fund or investment company, and therefore don’t own (or are buying/selling) the stock they’re evaluating.

Are Analysts All-Knowing?

Although many analysts are incredibly well-qualified, predicting the stock market (or the worth of stock) is hard to do. Some would say it’s impossible. The fees they charge for their services are often not worth their value; and while it’s true that they may have more experience investing, that doesn’t necessarily make them a better investor. The truth is, when large investors, mutual funds, or investment companies pay a stock analyst – they want them to be right. They give them a confirmation bias, so even if the analyst was correct because of sheer luck, they’d attribute it to their skill.

In fact, many successful investors – like Warren Buffett – don’t believe in the hysteria that both sell and buy-side analysts tend to work up within the stock market. Instead, they suggest focusing on long-term investment, passive investing, and not getting caught up in the market’s roller coaster.

It’s still wise to stay informed. Even if you aren’t buying and selling stock at the same rate a day trader might, you should keep up to date with current market trends, and overarching theories shared by some quality stock analysts. This will help you to make wise investment decisions, even if your decision is to neither buy or sell and stick with your investment strategy for the long term.

Another solution, which it’s easier and cheaper, is to use a Robo advisor like Wealthfront.