Consensus recommendations use analyst ratings to produce an average recommendation for a stock. Each analyst’s recommendation is assigned a numerical value, and the resulting sum is divided by the number of recommendations to determine the consensus recommendation. However, it should be considered an indicator and not the only data for investment decisions.
Consensus recommendations are essentially a collection of analyst ratings on a given stock that have been used to produce an average analyst recommendation. By identifying the key elements of each analyst recommendation, you can determine what the overall recommendation is for dealing with the stock option. A consent recommendation may indicate the action of holding current shares, buying additional shares, or selling all or part of the shares currently held.
To obtain a consensus recommendation, each stock analyst’s results will be assigned a numerical value. The type of recommended action inherent in individual recommendations has a different numerical value for each recommended action. For example, the buy recommendation would often be identified as 5, while a recommendation to hold current stock would merit a value of 3. After all recommendations have been identified, the numerical values are added and the sum divided by the number of analysts recommendations. The resulting figure will represent the consensus recommendation.
For example, suppose you collect a total of six stock analyst recommendations for a particular stock. Three advise to buy, while one advises to sell the shares and two advise to hold the shares. Using the numerical scale previously mentioned, this would give a sum of 22, which would then be divided by the number of recommendations collected, which is six. The end result is a consensus recommendation of 3.6, which is rounded to the nearest numerical value of the selections cited, or 3. Therefore, the consensus recommendation is to hold the shares for now.
It’s important to note that while the consensus recommendation is a great way to get the broad view quickly, it doesn’t necessarily recommend the best fit for the investor. The criteria used by each analyst can vary, resulting in differing opinions based on a wide range of data. For this reason, a consensus recommendation should be considered an indicator, but not the only data an investor should consider when making an investment decision.
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