Sell rating and how do you use that

Question

When watching the financial news, there is usually the upgrades and downgrades part of the show. At that time they share what companies have been upgraded to buy, but also which ones are downgraded to sell. Is that sell information just about cutting your losses and moving on, or is there more to it than that?

Answer 1

It's some analyst's opinion. It basically means that they think that the stock is going to go down at some point (not necessarily immediately) and you should either sell what you have or, if you're really daring, create a short position. You could also sell covered calls or buy puts if you want to use options to capture downward movements.

Note that sell ratings can be given for stocks that have gone up recently, so you're not always "cutting your losses" by following their advice - you may be locking in profits.

Answer 2

Any given listed stock will have been bought at various prices. Except for perhaps the first very little while after listing, each stock will also have had its ups and downs. So whatever price it has ‘now’ can represent a big profit for one and a big loss for another, and various positions in between.

Further, there are different strategies for investment. Some will buy and hold, relying on the dividend flow for income; others will seek to buy low and sell high at varying low- and high-watermarks. Some might go by feel, having no articulated strategy, and others have even less strategy, or grossly more complicated ones.

All of this means that one person’s ‘buy’ price is easily another’s ‘sell’.

What the ratings give you are summary opinions of analysts. We’d hope that these reflect sentiment about the future price of the shares, but I doubt any analyst will legally guarantee that their opinion will materialise. Aside from simply being wrong sometimes, unexpected events can overturn such predictions.

So what do these ratings give you? They provide a starting point (or an extra data point) for your own research and help inform your decisions.

Note that since your profits and losses are yours and not theirs, it would be inadvisable to rely blindly on ratings released on mass media. If you don’t have the skills or the data to evaluate the market, consider getting tailored professional advice. Although they can’t guarantee any stock market outcomes, at least they would be factoring in the specifics of your situation.