Have you ever read a stock news that reads “Is the analyst from investment firm A predicting that Y’s stock price will reach Rpxxx next year?” Such news is common in the Indonesian capital market.
News like this is intended to help investors find the best stocks for their investments. Although it is not a forecast But the numbers presented in the news are not mere speculations. Figures in rupiah that are reported in such news as the target price or target price are also allowed.
What is Target Price (TP) in Trading and Investing?
A target price is an estimate of the future price of a stock or other investment instrument offered by a financial professional for a particular asset. Target price estimations are not based solely on predictions. It also builds on historical data about issuer earnings and estimated asset valuations.
In addition to publishing on the news page in general These estimates are also presented in the form of an analytical report. The analysis reported in this report is certainly more complete than what is presented in the news.
It should be remembered that these expert estimates are not necessarily accurate. Although it has to be analyzed using a variety of methods, experienced traders and investors generally use what are known as consensus targets or average price targets that are offered by many analysts at once. The aim is to improve the accuracy of these price forecasts. Because, of course, each analyst uses different calculation methods and they do not cooperate with each other.
How to use target price
The target price is just an estimate of the price quoted by a team of experts. It does not ask traders or investors to buy certain stocks or instruments. However, the target price can be used as an estimate of which stocks will go up in the future or fall.
For example, Analyst A estimates that AA’s stock price target will be higher than its share price this year. This means that, according to analysts, AA’s share price trend is likely to increase (upside) and vice versa.
In addition to being able to be used as a factor in asset purchases The target price can also be used as a tool to assess the investment or performance of the financial analyst you hire.
For example, AA’s share price is expected to hit Rp5,000 per share next year. Although the normal economic conditions But the company’s share price is still stuck at Rs. 4,750 per share, you can use this spread as a benchmark to determine the credibility of your financial professional.
How to set a target price
Simply put, the target price ingredient is a company’s economic and financial variables, such as: EPS (earnings per share), price to profit ratio (continue), price-to-growth ratio (peg) and other fundamental factors Analysts can use three types of variable data over time: historical data. current information and estimates
The tool for processing these materials is a statistical method. Fundamental assumptions and (of course) computing and statistical applications. Assumptions are needed to predict future events for two reasons.
First of all, although today’s computers are advanced But the results of computer analysis cannot confirm God’s will. Second, the presence of assumptions in economic and financial analysis facilitates the calculations. And it’s a sign that there’s no perfect analysis.
However, one should not make an accidental assumption. various assumptions Supporting economic analysis requires proper logic and theory. For example, the assumption that AA’s company revenue will increase due to rising global commodity prices. or income expected to increase due to economic recovery after COVID-19 of indonesia
You will not find information about the above analytical instruments and materials. If you only read the target price from the news You will often have access to this analytics data. If you are a premium member of certain investment and stock trading applications or use the services of a professional financial analyst
Pros and Cons of Using Target Price
As with other metrics for estimating investment performance. Target prices have many advantages and disadvantages. Here are some of them:
- processed according to the dataAnalysts often estimate target prices based on available data. Even hypotheses have to be based on theory and data. This information is processed using a variety of statistical methods with sophisticated tools that may not be owned by all investors.
- Made by a team of experts. Are you a novice investor? Or an experienced investor who doesn’t have enough time and skills to analyze the market? Therefore, reading target price analysis reports from financial and investment experts is one of the investment strategies you should try. Although not always correct But at least the people working on this report are experts in their fields.
- practical. Not only practical in terms of skills and time management above. Estimated Target Price Reports Generated by Analysts It does not just mention a single stock or product. In fact, analysts will rank the best stocks for you.
- high risk, high return. Target price analysis can also be used to assess risk. So with this report You can estimate the level of risk involved in investing in the respective stocks based on the approximate rate of price change that occurs.
- inaccurate and inconsistent. Even if it has been processed and researched in such a way But there is still the possibility of price targets being inaccurate and inconsistent. The reason for this is that business cycles and the overall economy are often difficult to predict. even those who are experts in their field
- can only be considered. Due to the risk of uncertainty market risk and limited funds You can only use the target price as a consideration when choosing stocks or other instruments. (Especially traders) Your investment decisions must be flexible according to the current market conditions.
- analytical biasThis analysis bias arises because there is a need for analysts to estimate prices as accurately as possible with reality. For this reason, analysts often publish news about the latest price-adjusted estimates. of related stocks Of course, this type of bias will reduce the reliability of the analysis results of the team of experts involved.
One way to minimize investment risk is to read target price analysis from finance and investment professionals. In addition to the short-term effects Reading a report like this will increase your investment and finance knowledge. This will affect your investment decisions in the long run.