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QUESTIONS, ANSWERS CONCERNING ROLE OF ANALYSTS
What is the role of the securities analyst?
Analysts transform the complicated business strategies and financial statements of publicly owned companies into broadly understandable terms so that investors can decide whether the company is a good investment. To do so, analysts evaluate the company's operations and management. They use publicly available information, such as annual reports and regulatory filings, information gathered from their own research, and their own knowledge and expertise to determine the fundamental health of a company and its prospects for future growth.
How does the analyst add value for the investor?
In short, analysts sift through massive amounts of data and interpret their meaning. They bring many years of training, as well as a thorough knowledge of the industry they cover, to the reports and recommendations that securities firms issue. The typical analyst restricts coverage to 10-12 companies, which allows him or her time to investigate each one thoroughly, read reports, and dissect business plans. Their insights are shared with individual investors through their reports and a brokerage firm's registered representatives.
How do analysts determine if a company is a good investment?
Analysts use the information they have gathered and combine it with various economic models and views to form an assessment of the company's overall financial health and prospects for success. They draw, too, on their experience viewing economic events, watching companies succeed or flounder, checking how the marketplace is reacting to products, and evaluating senior management. From there, it is up to each investor to decide whether the company that a research report profiled is a good investment.
What else do analysts consider when making a recommendation in a research report?
Industry best practices and federal regulations require that analysts make independent judgments based solely on their research and expertise. The firms for which the analysts work have internal controls to ensure that analysts' reports are not improperly influenced by other business interests the firm may have with a particular company. Regulations recently approved by the Securities and Exchange Commission strengthen existing safeguards protecting investors' interests. Under these new rules, analysts' compensation must be severed from specific investment-banking transactions. Personal interests and firms' business ties with a company that is the subject of a research report must be disclosed. These and other provisions build on the Best Practices For Research that the Securities Industry Association adopted in June 2001. All of these efforts mandate one goal: research should be conducted at all times in a manner consistent with the investing client's objectives.
Should I consider an analyst's view when making my investment decisions?
Yes, along with other sources of information. These professionals have expertise enabling them to sift through information available on a company and make well-reasoned evaluations. But even two different analysts covering the same company can come to different conclusions based on the same information. Moreover, recommendations in research reports are not based on a specific assessment of your particular financial condition. A recommendation may be written for an audience that has different investment goals, risk tolerances, or tax considerations than you. That's why it's important for you to get information from a number of different sources before making an investment decision, and then for you to weigh that information based on your own specific financial goals and tolerance for risk.
How should I react when a stock is downgraded? Should I buy a stock when a favorable research report comes out?
You must make investment decisions that are suitable for you. Of course, a favorable research report may capture your attention. But that alone should not determine whether you buy, sell, or hold. If you see a favorable recommendation on a company, first investigate it thoroughly and then determine if it is an investment that fits your investment objectives and time horizon. And, certainly you should consider selling a security if it is downgraded and the analyst reports that there have been negative changes in the fundamentals or prospects of a company, or if it no longer fits with your objectives. But, here, too, investigate it thoroughly and don't rely solely upon one analyst's recommendation.
What protections do firms use to ensure that analysts are objective?
Each securities firm has internal controls, "Chinese Walls," designed to prevent the improper dissemination of information and to ensure that an analyst's independent judgment is not impaired by the firm's underwriting deals and other business relationships with the companies covered in research reports. Investors and their financial advisers need the best information possible to evaluate investment opportunities. The integrity of research is fostered and respected throughout a securities firm. New regulations and industry best practices prohibit analysts' compensation from being tied to specific investment-banking deals.
For further information
See the SIA investor education brochure, How To Read A Research Report, at:
http://www.sia.com/publications/html/how_to_read_a_research_report.ht ml.
