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Buy, sell or hold? Mr Analyst, will you please advise?

During the course of anchoring, Anjali had realised that most equity analysts hardly issue sell recommendations.

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No, an analyst will only tell you when to buy or hold, not when to sell.

MUMBAI: These analysts are a bunch of crooks and the worst type of crook is a crook that wears a suit and is interviewed on CNBC — Mitch Zacks in Ahead of the Market Anjali Shah, an anchor with a leading business channel, had reached a stage in life when she sees her friends gradually getting married. And so this metrosexual Indian woman had started feeling the pangs of loneliness. She met Rakesh Ahuja, an equity analyst, on a marriage website and they were about to meet.

Equity analysts working for stock brokerage firms are supposed to write research reports, which advise the customers of the brokerage firm on which stocks to buy and sell. These reports carry a recommendation at the start, like buy, hold or sell.

The recommendation is the most widely used piece of information in an analyst’s report. As Mitch Zacks says in his book, Ahead of the Market, "Not surprisingly, the recommendation is probably the most widely used piece of information in analysts’ research reports, simply because it is, at face value, easy to understand and appears to be straight forward".

During the course of anchoring, Anjali had realised that most equity analysts hardly issue sell recommendations.  Now that she was meeting an equity analyst, she thought she could find out.

Whe they met, Anjali asked the question. And this was Rakesh’s reply: "The reports that analysts write are distributed by brokerage firms to institutional investors and individual investors. And any analyst worth his salt is bothered usually about the institutional investors and not individual investors. This is because the level of respect an analyst commands among institutional investors essentially decides what he earns."

"But that does not answer my question," said Anjali.

"Have some patience, yaar! First things first. If I issue a sell recommendation on a company, the company can limit my access to them. This can put me at a huge informational disadvantage vis-a-vis other analysts. Then I really do not want to upset my main customers, the institutional investors, by issuing a sell recommendation. This is because a sell recommendation spreads like wild fire, with everybody wanting to sell out. This can lead to the value of their portfolios dramatically falling. So I put a stock on a hold recommendation, giving enough time to institutional investors to get out and then I may or may not issue a sell recommendation. And, finally the brokerage does not make money from my reports. They make money by selling shares. And these days, there are more sellers than buyers.

"As Mitch Zacks points out in his book, Ahead of the Market, ‘A buy recommendation has more value to a brokerage firm, because it gets the brokers on the phone selling stocks to new clients and opening new accounts", Rakesh said.
"Is that all to it?" asked Anjali.

"Well, this is only our first meeing," Rakesh said.

The example is hypothetical.

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