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Answer:
Dear
Joe,
Good
question. Something I imagine many BuyandHolders wonder
about.
Let's
start with a definition of what an analyst does.
Analysts:
who & what
A
security analyst studies publicly traded companies
and then makes buy and sell recommendations about
that company. Most analysts specialize in a single
industry or in one or two industries, including public
utilities, retail stocks, food and beverage companies,
REITs, banks, etc.
They
use a wide variety of analytical techniques to arrive
at their conclusions -- they study profit and loss
statements, debt levels, industry trends, national
trends, management teams, research and development
budgets, new products, marketing styles and the popularity
or effectiveness of a company's products or services.
Not
only do they crunch the numbers but they also often
visit the companies for which they are responsible.
Analysts
periodically write extensive reports on their companies,
explaining their recommendations. These reports are
then used by mutual fund, portfolio and pension fund
managers, by stockbrokers and less often by individual
investors.
The
Sell Side Analyst
This
type of analyst works for a firm that manages client
money, such as a brokerage firm. His or her research
reports are usually available to the firm's clients.
A
sell side analyst's focus is to determine if the investment
studied should be recommended to the firm's clients
-- whether or not it will make a good addition to
individual portfolios -- and at what price.
Among
the terms used by sell side analysts are: "strong
buy", "buy", "outperform", "neutral", "hold" and "sell".
These recommendations can help a broker or a brokerage
firm's clients make decisions about whether to buy,
sell or skip certain stocks.
It
is obviously in the best interest of the analyst to
make the right decisions about a stock. However, it
is in your best interest to realize that a sell side
analyst recommendations are "blanket recommendations"
because they are made for all of the firm's clients,
not just for you, an individual investor.
$Tip:
When you read a sell side analysts' report, do
not follow it blindly, no matter how brilliantly written
it is. You must determine if the stock is right for
you -- does it meet your investment and savings goals.
Equally important, you must decide if it is too risky
or too conservative for you?
The
Buy Side Analyst
This
analyst is typically employed by a mutual fund company
or a pension fund.
Buy
side analysts focus is on whether or not a stock is
in keeping with the firm's investment strategy and
portfolio.
Their
research is then used by the money managers of the
company that employs them. Their recommendations,
made exclusively for the fund that pays for them,
are not available to anyone outside the fund. In other
words, if a mutual fund company has hired a super
analyst, it does not want a competing fund to be able
to read what that analyst has written about a given
stock or an industry.
Bottom
Line
Both
buy and sell side analysts keep their jobs only if
they continually make smart recommendations.
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