How to Judge Broker or Analyst Recommendations?

How to Judge Broker or Analyst Recommendations?

Judging Your Broker's Recommendations

Brokers issue their recommendations (advice) as a general idea of how much regard they have for a particular stock. The following list presents the basic recommendations (or ratings) and what they mean to you:

·             Strong buy

and buy: Hot diggity dog! This is the one to get. The analyst loves this pick, and you would be very wise to get a bunch of shares. The thing to keep in mind, however, is that buy recommendations are about as common as snow in Alaska.

·             Accumulate and market perform: An analyst who issues these types of recommendations is positive, yet unexcited, about the pick. This is akin to asking a friend if he likes your new suit and getting the one-word response "nice" in a monotone voice. It's a polite reply, but you wish the opinion had been more enthusiastic.

·             Hold or neutral: Analysts use this language when their back is to the wall but they still won't say, "Sell that loser!" This is like when your mother told you to be nice and either say something positive or keep your mouth shut. In this case, this is the analyst's way of keeping his mouth shut.

·             Sell: Many analysts should have issued this recommendation during 2000 and 2001, but few actually uttered it. What a shame. So many investors lost money because some analysts were either too nice or just afraid to be honest and sound the alarm and urge people to sell.

·             Avoid like the plague: Too bad this recommendation isn't really available. Throughout history, plenty of stocks have been purely dreadful investments — stocks of companies that made no money and were in terrible financial condition that should never have been considered at all. Yet investors gobbled up billions of dollars' worth of stocks that eventually became worthless.