How to understand stock analyst ratings: Buy, sell, or hold
Stock analysts help investors by rating stocks as "Buy," "Sell," or "Hold." They dig into financial reports, listen to company calls, and study market trends to make these calls. But what do these ratings really mean? This guide breaks it down simply, with examples to show how they work—and if they're always right.
Key takeaways
- No two firms use the same rating system—terms vary.
- "Buy," "Sell," and "Hold" have hidden meanings depending on the source.
- Use ratings as a tool, not your whole plan.
- Analysts stay independent, with rules to avoid bias.
What are stock analyst ratings? A quick guide
Ratings like "Buy," "Sell," and "Hold" sound simple, but they're not. Analysts also use "Outperform" and "Underperform" to tweak their advice. Here's what they mean:
| Rating | Meaning | Other Terms |
|---|---|---|
| Buy | Stock should go up—worth buying. | Strong Buy |
| Sell | Stock may drop—time to sell. | Strong Sell |
| Hold | Stock will match the market. | Neutral |
| Outperform | Stock beats the market. | Moderate Buy |
| Underperform | Stock lags the market. | Moderate Sell |
Each firm has its own twist. An "Outperform" at one might be a "Buy" at another. Check their scale—like Morgan Stanley's—to get it right.
How do analysts make these calls?
Analysts don't guess—they research. Here's what they do:
- Check Finances: They study balance sheets and profits.
- Listen In: Earnings calls reveal company plans.
- Look Around: Some visit stores or talk to customers.
For example, an analyst might see Tesla's sales soar and rate it "Buy." It's all about the data.
Rating determination process
According to Investopedia and Charles Schwab, the process includes analyzing financial statements, participating in earnings calls, studying industry trends, using valuation models, and sometimes direct interactions. These steps ensure a thorough evaluation, but accuracy can vary.
Importance of rating systems
The lack of standardization is a key point, with firms using different scales. Charles Schwab mentions that the SEC and FINRA regulate to ensure transparency, requiring disclosures on methodologies and conflicts of interest. This helps investors interpret correctly, as explained on Charles Schwab's website.
Recent examples with real data
For examples, specific research was conducted on Tesla and Starbucks. For Tesla, Benzinga indicates a consensus of $311.92 in March 2025, with Wedbush at "Buy" at $550 and GLJ Research at "Sell" at $24.86 (Benzinga). For Starbucks, the consensus is $105.38, with Barclays at $124 and Jefferies at $76, including "Outperform" from RBC Capital at $115 (Benzinga). These data, dated January-March 2025, reflect recent and varied evaluations.
Who makes these ratings?
Two types of analysts rate stocks:
- Sell-Side: Work for banks like Goldman Sachs and share public ratings.
- Buy-Side: Work for funds like BlackRock and keep ratings private.
Why "Outperform" vs. "Buy"? Each sell-side firm tweaks its scale to fit its style.
Using ratings in investment decisions
Advice includes considering the consensus, understanding the systems (e.g., JPMorgan), evaluating analysts' track records, and combining with other research. A "Sell" rating can be concerning, but don't panic. Try these steps:
- See the big picture: Check consensus on TipRanks or MarketBeat.
- Match your plan: A dip might not matter if you're long-term.
- Dig deeper: "Sell" might just mean short-term trouble.
Wrap-up: Use ratings wisely
Stock analyst ratings are handy but not perfect. They're a tool—not a rulebook. Pair them with your own research, whether you're a cautious Buffett fan or a bold Lynch follower. Want to dive deeper? Explore scales at JPMorgan or track stocks on Yahoo Finance.