Generating investment ideas.

So how do analysts actually generate investment ideas? Well investment ideas should always be underpinned by a valuation of the security for equity analysts. This will be based on a violation of the company. This uses a mix of quantitative information for example ratio analysis of the historical financial statements and industry data combined with qualitative information, for example analysis of the company strategy and Industry developments. Together this information allows the analyst to build earnings and cash flow forecast for the company and generate the analyst valuation of the company. This will then give unemployed share price based on this valuation, which is referred to as a target price.

The analysts then compares this target price to the current traded share price of the company to determine whether it's higher or lower. The difference between the target price and the current price will be used to determine whether the analyst will recommend that investors buy sell or continue to hold their existing position in the company's shares. It's absolutely critical to understand here that the investment recommendation is a view on whether the market is mispricing the shares and not whether the company is good or bad. For example, a buy recommendation means that the analyst believes that the shares are being undervalued by the market. Someone buying the shares could then sell them once the market discovers their true value and this will generate an investment return for the investor. When discussing investment recommendations analysts often talk about upside and downside potential upside potential is the extent which the target price exceeds the current price whilst downside potential is the extent which the target price is lower than the current price.