Buy, sell or hold

Investment analysts always love to give an advice about shares. Most of the time they use the words buy, sell or hold to give a short statement about their advice. These opinions are easy to understand and can be counted to get an overall advice (and to determine the buy-to-sell advice ratio).

Investment analysts revise their statements and change their advice from buy, sell or hold to buy, sell or hold. This may mean that the fundamentals (like profit or dividends) of a company have changed. But it can also mean that the share price has changed, and therefore the risk to return ratio has changed. Another common cause for changing an opinion is a specific event or hot news that triggers the investment analysts. This means that you should always look why an investment analyst changes (or gives) a certain advice.

Another point of attention is the overall stock market. At any point in time, each share on the stock market have a certain number of buy, sell and hold advices. It is your own responsibility to determine the right share, and you can use the opinions of the investment analysts. So, first of all you can look at the opinions (and look whether the opinions are up-to-date). Secondly, you should see whether you agree with the advice of the different investment analysts. And finally, you should determine whether the action you take (buy, hold or sell a share) is the best transaction you could do at that moment.

You should also take into account that investment analysts are most of the time related to a financial institution. This means that when they give an advice to buy a share, the financial institution most likely already acted upon this advice. This means that you are never the first one that can take advantage of the advice. So you should always check whether the price of the share has increased or decreased the last couple of days. When this is the case, check whether the financial institution has something to do with it.

But what do the different opinions mean?

Buy or Sell

The buy advice is an advice to buy a certain share. The sell advice is an advice to sell a certain share. You could have guessed. But this is not always that straightforward.

Opinions are most of the time based on current events and have a high relation with the sentiment on the market. This means that shares with weak fundamentals, could get a buy advice. These short-term opinions are mainly based on technical analysis, a newsflash from yesterday evening or a rumour that buzzes around. And when you really think that the fundamentals are more important then the short-term prospects or that you do not believe the rumours, you should not buy the share.

On the other hand, when the fundamentals of a company are very strong, but the investment analysts gives off sell-advice, the sentiment may turn or be bad. This may be an indication of a bargain to be in the near term. The share price will decline, and you can use the opportunity to buy the share before the investment analysts revise their opinions.

Hold

There are three actions you can perform when you are investing in shares. You can buy shares, you can keep the shares you own, and you can sell the shares you own. But that does not necessarily mean there are three types of opinions investment analysts can give.

An advice to buy shares sounds OK to me. The sell-advice can also be very useful. But an hold advice?

Shares that you do not own, you cannot hold on to. So the hold advice is a 'do not buy' (or sell) advice for investors that do not own the share for which that advice is given. From that point of view the hold advice simply does not make sense.

But shares that you own, you can keep. But still, do you want to keep a share which is really not worth to buy? I don't think so. So from the point of view of investors that own a share, the hold advice is actually a sell advice.

So in my opinion there are only two types of advice: the buy advice which is an indication that the share is worth buying or keeping. The second advice is the sell advice, which is an indication that the share is not worth buying or keeping. The hold advice should be treated as a sell advice.

Buy-to-sell advice ratio

The buy-to-sell advice ratio is the number of buy-opinions compared to the number of sell-opinions on a share. This ratio can be used to verify what the current sentiment about a share is in the market. This buy-to-sell advice ratio can be used as an indication of which shares are buy-able.

Because investment analysts are opportunists and some even want to sell you something, the buy-to-sell advice ratio is unbalanced. This means the number of buy-advice is usually much higher than the number. Sometimes the mean buy-to-sell ratio is even above 7 to 1 (the ratio of all the advices of all shares combined). This can only mean one thing, you cannot trust the advice of the investment analysts. You really should make up your own mind!