Analysts Jargon, Underweight, Neutral and Overweight

Q. What are Broker Tips?


A: Broker tips are recommendations to buy, sell or hold shares made by brokerage firms. These range from well-known, international brands such as Goldman Sachs and JP Morgan through to much smaller companies. This website covers broker share tips which are issued for companies which are traded on the London Stock Exchange.

The tips are divided into three types: Bullish, Bearish and Neutral. With a bullish tip, the broker has a positive view on the company's prospects relative to its current share price (and, in turn, they expect it may rise in price) and with a bearish tip they have a negative view (and it may fall). These types are further subdivided:

  1. Bullish: Strong buy, Buy, Overweight, Outperform, Add
  2. Bearish: Sell, Underweight, Underperform, Reduce
  3. Neutral: Hold, Neutral, Equal-weight

These vary according to conviction; that is, how strong a view the broker has of that company. With the Bullish tips for example, a Strong buy recommendation issued by one broker carries more conviction than an Add recommendation from the same broker.

You should note, however, that different brokers use different methods to arrive at their tips, so a particular recommendation from one broker cannot be directly compared to the same recommendation from a different broker.

How does a broker arrive at a tip?

This will vary according to the analyst working on the tip. The methodology used may incorporate some or all of the following factors:

  1. Calculating a valuation for a company based on its fundamentals; or, in other words, what the company is worth.
  2. Comparing the company's performance to that of its sector peers.
  3. Looking at macroeconomic conditions, and the stage of the economic cycle we are currently in (particularly true for cyclical companies such as airlines).
  4. Looking at general market conditions, such as whether the market is currently in a bull or bear phase.

In the case of Bearish tips, some traders may look for the opportunity to go short of that company's shares. Short selling means you are essentially taking a view that a share price will fall. With the ability to go short, you can potentially profit both when a company's share price goes up (assuming you are long) or down (assuming you are short). For private individuals, this can be done via either a financial spread betting or CFD company; with these higher risk products, you always need to be very aware of your exposure to the share price as you can lose significantly more money than you deposit in your account.

What are some things to beware of?

Broker tips may not always be quite as they seem. For example, they may be the work of the company's house broker and have been approached with a positive bias. Equally, they could be the result of paid research commissioned by the company itself. Again this could result in a more positive light being cast on the company than otherwise would be.

In the case of Enron, just prior to the collapse of the company's share price almost all brokers had a buy or strong buy rating on the stock. This is covered in the 2005 film "Enron: The Smartest Guys in the Room" and acts as a cautionary tale for those investing their money solely on the basis of such tips.

Q. I would just like to know what precisely the jargon means that analyst use in terms of rating shares. e.g. Underweight, Neutral and Overweight...


A: Its obvious what buy and sell mean but other terms they use are less obvious.

It means as a percentage of their portfolios...I think they mean in a balanced portfolio underweight would be hold a smaller amount than your average and overweight more than your average investment. However, the truth is more like underweight = sell and overweight = hold while only buy means buy!

Keep in mind that many of these analysts appear to write complete crap and have their own agenda which mainly seems to be trying to get shares to move the way they want them to move! If you followed broker recommendations I am pretty confident you would be in the poor house quicker than going it alone and thinking for yourself. More information on Analysts Research is available here. Be especially wary of company paid-for research which you should really take with a pinch of salt*.

* He who pays the piper calls the tune, and all that! ;0)

Remember with City analysts you really need to read between the lines - for instance in the last business update Fenner PLC (FENR) announced -:

"There has been a limited initial impact on us from the global financial crisis but we are of course alert to the wider economic effects that are generally expected. These are more likely to be seen in industrial markets although the niche nature of our businesses and the diversity of our markets provide additional strength and resilience. The energy markets remain buoyant with a positive outlook, particularly for coal, notwithstanding the recent reduction in the prices of commodities. The majority of our products and services are consumable supplies and are two therefore driven by usage rather than the price of commodities. Accordingly the output for these remains robust.

"Despite the inevitable challenges, we believe we are very strongly placed to out-perform.

...two things stand out:

"we are of course alert to the wider economic effects that are generally expected"


"Despite the inevitable challenges"

...what they really are saying is that trading is OK for now but there could be trouble ahead.

So keep in mind that 'The City' almost never tells clients to sell specific stocks directly - at best they issue mildly neutral notes which leave personal investors confused or in rare cases when the outlook for a company is really bad they might use the adjective 'underperform'. Remember that analysts have specific knowledge they could share with us that would help us profit - but they don't provide it. In fact most of the times it is as if they are hiding it. So although there is almost never an offical sell note recommendation in the City, everyday there are hundreds of buy recommendations. Sell recommendations - virtually never!

Also, be wary of analysts downgrades. A stock can be making perfectly good progress, take SBRY as an example, and whaddya know, it's knocked by a downgrade. Most of the times the downgrade is already priced in but that doesn't seem to stop an immediate downward pull. Seems to make holding anything quite treacherous. In any case don't let broker upgrades/downgrades worry you too notes are ten a penny...

To conclude you should never act blindly on the basis of a tip. Instead, tips should be used as a starting point for your research and should at the most only be one of many boxes you tick before making an investment or trading decision.

Broker Ratings for 888 Stock

Lastly do keep in mind that trading is a skill quite apart from being an analyst. You can be the greatest analyst in the world, calling the moves correctly is one thing, taking advantage of your analysis in the market is quite another.

Q. What is the difference between the Bid and Ask?

Does one mean the cost price and the other the selling price? I often see shares being quoted as in the below for instance but I'm puzzled as to their meaning...

A: Ok, let's take an example -:

Bid 1.56
Bid Size 3,000
Ask 1.65
Ask Size 1,725

The Bid price is the maximum that somebody has made it known they are willing to buy for; the size is the number of shares they are willing to purchase at that price.

The Ask price is the minimum price that somebody is willing to sell for, and similarly the size is the number of shares. The difference between the bid and the ask is known as the spread (which is different to the bid-offer spread in spread betting).

 ...Continues here - Preference Shares and Share Splits

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