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Part: two Analysis Tools > Analysis Tool #3: Establishing Target Prices

Chapter 6. Analysis Tool #3: Establishing Target Prices

Many professional money managers compute a target price, the price they expect to sell it at if all goes well, before they buy a stock. The target price defines the potential profit on the investment, and if it isn't high enough to justify the risk, they don't buy the stock.

Computing target prices is not the same as determining the reasonableness of a stock's current price (described in Chapter 5). Instead, the target price calculation forecasts a stock's trading range at some future time. How far depends on your goals and investing style. Value investors usually find themselves analyzing distressed companies, and they don't know when a candidate will regain its footing. So it's necessary for them to look three to five years ahead. Growth investors usually have shorter timeframes and may only look 12 months to 18 months ahead, typically to the end of the next fiscal year.


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