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Analysts

Stock analysts' recommendations permeate the financial media in TV, on the Internet, and in newspapers. Their job is to make predictions and recommendations. Security analysts are usually employed by brokerage firms and investment banks to generate information and recommendations about firms and industries. Their clients are as diverse as individual investors, mutual funds, hedge funds, and pension funds. As a group, analysts are highly trained in finance, economics, and accounting. In addition, an industry trade group oversees the popular designation, Chartered Financial Analysts (CFA). The CFA designation is to the investment industry what the better-known CPA is to the accounting industry. One must pass three rigorous exams and have three years of investment industry experience to earn the CFA. The rewards are great for the successful analyst. Average salaries for analysts rose from $400,000 in the mid-1980s to nearly $3 million at the end of the 1990s. The star analysts make much more.

Analysts forecast many things about firms, such as earnings, dividends, and sales. However, the recommendation to buy or sell stock is the decision most followed by investors. There are several recommendation systems used by analysts to express their belief about the future of a certain stock. Each system uses a slightly different vocabulary, but most systems can be expressed in five categories which I will call Strong Buy, Buy, Hold, Sell, and Strong Sell. Are the recommendations of analysts useful to the investor?


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