Price target
A sell-side analyst's forecast of where a security's price will be over a stated time horizon — the number that turns a Buy, Hold or Sell rating into a specific, checkable prediction.
In plain language
A recommendation to "Buy" is not very useful on its own. Buy at what price, and expecting what gain?
A price target answers that. It is the analyst's forecast of the future price performance of a security, given alongside the rating, so a reader can work out the expected return the analyst is actually calling for.
How it works
The workbook introduces the idea in Chapter 1: sell-side analysts' recommendations "include the analyst's expectations of the future earnings of the company and future price performance of the security ("price target")."
A price target is not a free-standing number — regulation 20 requires it to be issued alongside a defined rating system, with its time horizon and benchmark stated. And once a rating or target has stood for at least one year, the report must carry a graph of daily closing prices for the period it has been assigned, or three years, whichever is shorter.
A worked example
An analyst issues a price target of Rs 1,240 on a stock trading at Rs 1,050.
Expected return = (1,240 − 1,050) ÷ 1,050 = 18.1%
If the firm defines "Buy" as an expected return above 15% over 12 months, this call is internally consistent. If the same Buy rating and target have been in force for 14 months by the time of a later report, regulation 20 requires a daily closing-price graph — covering the 14 months the rating has run, since that is shorter than three years.
Why NISM asks about it
Chapter 1.1 introduces the term, and Chapter 14 (regulation 20) sets the disclosure rules around it. Expect a question computing an implied expected return from a price target, or one testing the price-graph requirement once a target has run for a year.
Common exam traps
- A price target is not the same as intrinsic value. Intrinsic value is a fundamentals-only fair value; a price target can also reflect near-term catalysts, momentum or a shorter time horizon than a full intrinsic-value estimate.
- A price target without a stated time horizon and benchmark fails regulation 20 — the number alone is not enough.
Check yourself
1.Research reports of buy-side analysts are:
- a)Published in the public domain with price targets
- b)Generally for internal consumption and not available in the public domain
- c)Sold to subscribers on an annual basis
- d)Filed with SEBI before circulation
Show the answer
Answer: (b) Generally for internal consumption and not available in the public domain
These analysts generate investment recommendations for their internal consumption viz. used by the fund managers within organization. These reports are usually only for internal consumption and are not available in public domain.
Who they work for: Buy-side Analysts generally work for Asset managers like mutual funds, hedge funds, pension funds, Alternative investment funds, Foreign Portfolio investors or portfolio managers that purchase and sell securities for their own investment accounts or on behalf of their investors/clients. Their reports are circulated among the top management/investment managers of the employer firms.
Option A describes the sell-side: Sell-side Analysts typically publish research reports in public domain on the securities of companies or industries with specific recommendation to buy, hold, or sell the subject security, including the analyst's expectations of the future earnings of the company and future price performance of the security ("price target").
Option C describes independent analysts, who sell their research to others on a subscription basis.
The simplest way to keep the three apart is by where the report goes: public domain, internal only, or sold on subscription.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- Margin of safetyThe gap between a security's estimated intrinsic value and the lower price paid for it — the cushion that protects the buyer when the estimate turns out to be wrong.
- Research reportA document presenting an investment idea — analysis plus a recommendation. SEBI excludes market commentary, index discussion, internal notes and statistical summaries from the definition.
- Sell-side analystAn analyst at a firm offering investment banking, broking or advisory services who publishes research in the public domain with a buy, hold or sell call and a price target.