What Is Target In Stock Market: Rating agencies and brokerages regularly post updates about stock ratings and target prices. Market enthusiasts and veteran investors might come across these articles on a daily basis.

If you ever found yourself opening these articles, you might have come across the words “Target Price”. If this is your first time reading it, you might have asked yourself, or a close friend who happens to be an active investor, “ What Is Target In Stock Market?”

Here, we’re going to explore the meaning and various functions of the price targets in the stock market, and by the end of this blog, you’ll be left a whole lot smarter with a clearer understanding of target prices, ratings, and price evaluations. So let’s get started, firstly with the meaning of price targets. 

Meaning Of Target Price

Brokers and analysts give something called a stock rating, followed by a target price. A target price is an estimation of the future price of a stock from its current market price.

The ratings and targets are given out based on research, earnings reports, and the company’s recent performance.

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Importance Of Target Price Over Analyst Ratings

When analysts give a rating on a stock, such as “BUY”, “SELL” or “HOLD”, they also give a price target at which the stock will move. 

While the ratings themselves are easy to read and understand, if you want to become an intelligent investor, you should read through the justification for the rating as well.

Additionally, ratings are based on the opinions of the analysts and brokers and don’t provide the complete picture. In fact, you will come across contradicting ratings on the same stock, but different brokers.

Instead of solving the confusion of investors looking for stock recommendations, it leaves them even more confused than before reading the news. 

Another reason why ratings do not work is that they don’t apply to every investor. Not everyone has the same tolerance for risk, investment time frame, and goals to follow stock ratings by the book. 

What Is Target In Stock Market?

A price target is the stock price that analysts believe a stock price should be valued at when considering important factors such as historical earnings figures, growth rate, and also its projected earnings for the future. 

This means that when the stock target price is above its current market price, analysts believe that the stock is currently undervalued compared to its earnings or competitors, combined with its profitability and revenue growth. Here the analysts expect the stock price to rise in the future.

Alternatively, when analysts lower a stock price, it indicates they expect poor performance, low earnings, and even losses in the future to come.

This gets reflected in the share price, which directly hits the portfolios of investors. Depending on the analyst or broker giving the rating, it directly impacts the current market price of the stock.

This is due to the fact that both traders and investors follow the broker, and/or they hold a stake in the company in discussion. 

Take this example of Bharti Airtel. After global investment bank JPMorgan downgraded the stock to underperform, the share price of Bharti Airtel tanked for 2 consecutive days. JPMorgan’s statement on the matter was – 

“We believe that 5G capex, a lack of tariff hikes, and deflation in premium ARPUs (Average Revenue Per User) will drive down ROICs (Return On Invested Capitals).

Bharti’s shares bake in modest FY24E capex, a 10 percent tariff hike, and continued ROIC expansion in FY23 that are all at risk.”

Factors To Watch When Looking At Target Price

When price targets and ratings are released, most readers end up focusing on just the ratings, current market price, and target price. However, much more research is needed to consider the report authentic before seriously considering the findings. 

1. Forecast Assumptions

Firstly, we have forecast assumptions. Specifically, the earnings forecast for the company. The report should have realistic and possible earnings forecasts for the company to justify the rating and target.

And even if the earnings predictions are higher than normal, they should be backed up by a unique event, such as a new business model, government reforms, and a shifting dynamic in the industry. 

2. Valuation Factors

When rating reports are being prepared, most of the data is reliant on important ratios such as Price/Earnings ratio (P/E), the Price/Book value ratio (P/B), and the valuation method itself (Relative or Absolute).

With that being said, a report should consider multiple factors to be considered authentic and reliable. 

3. EPS

Earnings play an important role in the target price, and when the reports are published, they need to be detailed in terms of their earnings forecast models.

Certain industries do not move the same way as others do, so special consideration has to be taken to make an accurate rating and target price.

By detailed, we mean studying the companies’ financial statements, profit margins, and sales growth.

Based on the frequency of the report, the analyst firm or brokerage can provide a follow-up report on their own rating to compare their forecasts to the company’s performance.

Disclaimer About Target Prices

We’ve spoken extensively about target prices, while also explaining what is target in stock market.

Despite analysts conducting thorough analyses and studies, using various valuation models, readers and investors who look at target prices must be aware that target prices can always deviate from the true market price of the company in the future.

Despite educated guesses, target prices cannot accurately predict the market movement in the future.

Also Read: Is Swiggy Listed In Stock Market? Funding, IPO, and Acquisitions!

In Closing

Stock price targets are a good insight into the market and the stock itself. They reveal the insights of the brokerage or rating firm regarding a stock or industry, and reading these reports can be quite educational.

You will be exposed to new perspectives when looking at a company and also learn how and why target prices are set.

Before making an important investment decision based on these reports, it’s better to familiarize yourself with the reports and also their accuracy. For more such related content on investing and the stock markets, Join Fingrad!

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