Understanding Equities - Question 84

How do analysts evaluate a stock? How accurate are they?

Analysts evaluate stocks by examining the earnings of a company and its prospects for the future. They also analyze the prospects for growth for the industry and economy, and look at the historical data of the company’s finances. They may meet with the company's management and discuss its growth and operations to get a feel for the effectiveness of its leadership. Some analysts meet with the company's competition, suppliers, customers and clients, and look for trends within the industry as well as the company. It is crucial that the analysts study the demand for the company's products or services (both domestically and overseas) so that they can accurately forecast growth prospects. In addition, they must have thorough understanding of the company's finances, profit margins, and areas for improvement.

Analysts who are not accurate in their predictions usually have to change jobs because they're replaced. Analysts stick out their necks by making forecasts and predictions, in black and white, in written reports. They are held accountable.