A price target is the price that a stock analyst believes that a given share will reach in a specified period of time.
If the stock reaches that price, it is presumed that the investor should sell the stock in question since it is unlikely to exceed that value in the short to medium term.
Active investors seek to buy stocks and other investments at favorable prices relative to a potentially higher future price. That way, they can book a gain on the investment and reinvest the resulting cash.
Many investors rely on third-party advice from stock analysts who work at major banks and brokerage firms. They study hundreds of stocks in search of shares that are mispriced relative to their underlying company’s performance.
Once an analyst identifies a potential investment opportunity, the natural question is at which point to buy and at what point to sell the stock.
Analysts regularly recommend shares for purchase and publish a price target along with the recommendation. The price target is in dollars and the analyst usually predicts in what time frame that price is likely to be reached.
If the analysis is correct and the stock hits the price target, the investor would do well to exit the stock and take the gain.
Of course, there are many analysts looking at many of the same stocks. Their price targets may differ dramatically.
That’s because each analyst will give different weightings to factors that can affect the short-term price of a stock. Earnings, corporate debt, management decisions — each has an impact on the public perception of a stock’s value.
In addition, the market itself can change the value of a stock. Some investors may decide to sell a stock for reasons unrelated to the stock itself. Pension funds, for instance, may choose to liquidate to raise funds to pay benefits.
Macroeconomics plays a role, as do interest rates and the economy. That can make it extremely difficult to pin down a price target.
As a result, analysts often update price targets, moving them higher or lower, based on technical analysis, events in the news and, of course, earnings information as it becomes public.
A target price, then, is really a marker of confidence in an outcome that is subject to change. Investors must follow analysts closely in order to fully understand each price target in context.
In addition, some analysts are more accurate than others based on sector knowledge, contact with the company, trading experience and a host of other factors. Investors often will read several analysts’ work before choosing to follow one or another, or combining their views.
Trading on a price target is by no means a sure thing. However, even limited information can given an investor a framework for deciding whether to buy, sell or hold a given stock in the future.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.