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Buy, sell or hold – the 3 main decisions you must make about any stock in which you are interested. If you don’t have the stock, should you buy it? If you have it, should you sell it or hang on to it (hold it) for a while?

You may have your own ideas about what to do but analysts are professionals who are paid to have an opinion about these things as well. An analyst, who is supposed to have expertise in evaluating investments is typically employed by a brokerage firms, investment adviser or mutual fund. The best analysts are certified and are designated Chartered Financial Analyst (CFA).

Related: Widget Spotlight #13: The Analyst Ratings History

Buy Side Versus Sell Side

Financial analysts work on either the buy-side or the sell-side. A buy-side analyst develops investment strategies for hedge funds, mutual funds and institutional investors while a sell-side analyst advises financial services agents selling securities, such as stocks or bonds.

Some analysts are independent and serve as researchers or business media analysts. Typically, analysts specialize by industry, geographical region or even product type or sector. Analysts evaluate financial data, including historical data. They also study economic and business trends that apply to their area of expertise.

A Closer Look At The Process

Overall, an analyst looks at a company to determine whether it is profitable enough to justify investment. This involves close and careful evaluation of the company’s income statement, balance sheet and cash flow statement.

Analysts perform many calculations to help them evaluate a stock. One common ratio is called return on assets (ROA), which helps the analyst determine how efficient the company is at using its assets and in creating profit.

The approach can be either top-down or bottom up. In simple terms, a top-down approach looks for high-performing sectors and then drills down to find the best companies. A bottom-up approach starts with a specific company and tries to determine future performance based on past performance.

Related: Widget Spotlight #12: Company Ratio Analysis

Choosing An Analyst To Follow

All analysts are not alike. Reputation and notoriety matter but to find analysts worth following, you should do some investigation. One example has to do with both positive and negative earnings surprises and the fact they can have a big effect on stock prices.

Find out how the analyst is compensated. That will give you an idea whether they have an interest in being honest. There has been scrutiny, for example, of sell-side analysts due to the close relationship they have with companies they issue buy ratings for.

On the other hand, buy-side analysts tend to have a vested interest in the stocks they cover. A positive rating may indicate they hold that stock and want to encourage a price increase. Buy-side analysts have an incentive to place a buy rating on stocks they hold and a sell rating on stocks they sold recently. The more you know about an analyst, the easier it will be to know who to follow. It makes sense to view compilations of several analysts, which is easy to do using the various widgets available on FinanceBoards.

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