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The Analyst Analyzed

The Analyst Analyzed
Many investors just do not have the time to do all of the research needed for the stocks that they want to invest in.  Notice we said invest.  This is because if you are a technical trader who follows charts you do not need an analyst.  An analyst's job is to figure out the fundamentals of a particular company.  But shortterm traders do not trade on fundamentals and therefore we do not need analysts.  However we do have to be aware of what an analysts says about a stock that we have a position in because the crowd will always react to the analysts statements. 

There is a vast amount of information about companies and the average investor does not have the time to do the indepth research required before they invest in a particular company this is where analysts come in. These individuals are supposed to be providing investors with research on particular companies and have the best interest of those investors in mind.  But do they really What is the real reason they are there They are there for the investors alright just not the small main street investor.  Their sole purpose in life is to be there for the big institutional Wall Street investors not the average investor on the street.  However the average investor does not know this fact and thinks that they are on a level playing field with the big boys when they follow the analyst's recommendations. 

Increased popularity of analyst ratings over the past several decades has expanded the influence of these ratings on the price of stocks. The slightest change in an analyst's rating on a particular stock can send the stock rocketing higher or spiraling downward on a whim.  Analysts have power; too much power in our opinion but it is what it is and we must respect that power regardless of whether or not we believe in the analyst.  Analysts have many conflicts of interest and this is why the small investor should never believe in them.  Tonight we will attempt to explain the different types of analysts and what exactly drives each analyst's recommendation. 

Three Categories of Analysts:
1) Buyside Analysts 
They are employed by large institutional investment firms such as mutual funds or insurance companies.  They offer recommendations on stocks in their employers' accounts. These analysts focus their research on specific sectors or stocks that are of interest to the investment firm.  These reports are mainly for internal use. 

You do not hear much about these guys they are behind the scenes but they are the ones to listen to if you can get to them. 

2) Sellside Analysts
These are the ones to be aware of.  Employed by broker dealers and investment banks they work in the retail investment division. Their recommendations and ratings are created for the purpose of selling an investment to clients of the brokerage firm. The reports issued by these analysts are for public disclosure.  These are the ones that you see on all of the stock channels pumping up stocks.  Beware!!!!

3) Independent Analysts
These analysts are not employed or associated with any specific brokerage or company. Independent analysts provide unbiased and objective ratings and they receive compensation either from the companies they research or by selling subscription based reports. 

Conflicts of Interest
Investment banking relations are one of the most significant areas of conflict of interest for analysts. Investment banks are financial institutions that perform underwriting services.  They also intermediate between an issuer of stock or bonds and the investing public. When a company decides to go public (IPO) it will obtain the services of an investment bank to facilitate the process and sell the new stock to investors.  Consequently an analyst may face a conflict of interest because if the analyst of a particular stock works for the same investment bank underwriting that new stock then they may be inclined to give positive recommendations to ensure that the offering is successful.  Also stock ownership is another conflict of interest for the analyst.  Through direct ownership or through a pooled stock purchase plan analysts and employees of the investment bank may own the very stocks that they are recommending. Analysts then may be reluctant to issue poor reports or recommendations on a stock that they own. 

We have very little faith in the analyst for the several reasons mentioned.  The next time you hear about an upgrade or downgrade form some analysts ask yourself Does this analyst really have MY best interest in mind

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