What is a price target?
A price target is the projected future price level of an asset as indicated by an analyst or an investment advisor. The price target is based on assumptions regarding the future supply and demand of the asset, technical levels and fundamentals. For individual traders, who can develop their own price targets for the assets they trade, the price target is where they will seek to leave their position because the initially expected value of the trade has been recognized. Price targets may change over time as new information becomes available.
How price targets are determined
A price target is the expectation of an analyst or operator as to the future price of an asset, such as a stock, a futures contract, a commodity or an exchange traded fund (ETF).
An influential Wall Street analyst could give a stock that is currently trading at $ 60 a year-long price target of $ 90. Since some traders rely on the opinions of analysts, such a change in price target could have a positive impact on the stock price as traders seek to buy the stock based on the new price target .
Different analysts and financial institutions use different valuation methods and take into account different economic forces when deciding on a price target. Since valuation methods vary by analyst or trader, price targets will also vary. There is no way to know for certain the value at which a security will trade in the future. A price target is a calculated estimate.
Technical analysts use indicators, price action, statistics, trends and price dynamics to assess the future price of an asset.
Fundamental traders use financial statements and ratios, growth rates and assess the management of the business to help make target price projections.
Two separate investors holding a stock for $ 60 may have radically different views on the destination of the stock. One investor can set his price target at $ 75, while the other set it at $ 120. Price targets are a function of risk tolerance and the length of time an investor plans to hold the security. These two investors may be right depending on their different investment horizons. The investor with a target of $ 75 may want to be out of the trade within one year, while the target trader of the $ 120 price may be willing to maintain the trade for 10 years.
Price targets are subject to change and are not static. New asset information is coming out all the time. Therefore, the asset price target may change from time to time.
An asset which, according to an analyst or a trader, is priced too high may have a target price lower than the current price. This means that they expect the asset price to fall to a lower price target, instead of going up to a higher target.
Key points to remember
- A price target is the projection by an analyst or trader of where the price of an asset will go.
- A price target may be lower or higher than the current market price of the asset. A higher target price is bullish, while a lower target price is bearish.
- The price targets vary from individual to individual, as each operator uses different methods to project the price targets.
- When leading analysts change their price targets, this can have a significant impact on the price of the asset.
- The investment horizon is very important when considering price targets. A much higher price target is more reasonably expected over a longer period of time, while a short-term price target tends to be more conservative.
- The price targets do not take risk tolerance into account. Risk control is the responsibility of the trader. A security may reach the price target, but if it collapses by 50% before that, it may not be ideal for many investors.
A real example of a price target
Price targets often affect the price of a security itself. For example, if a stock trades at $ 60 but the company has a bad quarter and analysts reduce the price target from $ 70 to $ 50, it could generate sales activity and lower the price of the stock. closer to the $ 50 goal. Conversely, if the same company with a share price of $ 60 has a good quarter and analysts increase its target price from $ 70 to $ 80, more investors will probably choose to invest, which will increase the share price.
For example, on February 21, 2019, the British auto parts company Delphi Technologies announced a profit that seemed quite low, as revenues fell 9% and the company said it could see a few weaker quarters to come up. That said, adjusted results still exceeded analysts’ expectations for the quarter. The stock rose 19% to close at $ 21.74, up from the previous day’s close of $ 18.25.
The following day, a major analyst firm improved the title, raising the price target from $ 20 to $ 30. This may have helped push the price up, as the stock rose 10% at the start of the session before closing the day at $ 23, 5.8% higher.
It is impossible to assess exactly how much of the increase was attributed to the upgrade, as prices go up and down all the time. Although upgrades and higher price targets generally push prices up, while downgrades and lower price targets generally have a negative effect on stock prices.