A price target is an estimated value of a security based on an individual investor’s or professional analyst's assessment. It is a representation of what the investor or analyst believes the security to be worth.
Analysts will commonly publish their price targets in formal reports, and traders sometimes use price targets to determine whether or not to buy or sell a security. Understanding how price targets are determined and how they are used can help you expand your investing knowledge, but it’s not essential.
Definition and Example of Price Targets
A price target is what an analyst believes to be the true value of a security, which is also known as the intrinsic value. This is often different from the current market price of the security and is meant to convey whether the analyst believes the security is under- or overvalued. For example, an analyst may review a stock that is currently trading at $35 per share and assign it a price target of $42.
Analysts may incorporate both fundamental and non-fundamental, or technical, information into their assessments to determine price targets.
Fundamental factors used to evaluate the value of a security include economic data and financial information about the company. The use of financial ratios such as price to earnings is a key component of fundamental analysis.
Technical analysis relies on patterns in stock price movements to gauge future price movements. Technical indicators may suggest to an analyst that a price will rise or fall to a certain level.
How Price Targets Work
Analysts review securities to determine their value and make recommendations to buy, sell, or hold them. As part of that process, analysts will typically generate a price target and publish it along with their recommendations. The price target is typically the price a stock is expected to reach in 12 months.
Investors that follow analysts’ recommendations may then decide to trade based on the relationship between the current price and the target price. If the current price is below the target, this suggests that the security’s price is expected to increase and the investor may buy it. If the current price of the security is above the target price, it indicates that the analyst expects the price to fall. The investor would either not buy the security, or if they already own it, they might sell it.
Continuing our example above of a stock trading at $35 with a price target of $42, an investor who makes decisions based on price targets would likely buy the stock.
Do I Need to Know Price Targets?
You may decide to consider price targets as part of your own investment analysis and decision-making process, but it’s not necessary.
Price targets are not relevant for long-term investors, such as those who follow a buy and hold strategy, because they are typically given for periods of about a year.
Price targets are also not relevant for index investors because they will hold what's in the index regardless of an individual stock’s price targets.
Target Price vs. Current Price
The current or market price is what the stock is currently trading at on the open market. It is a reflection of the current supply and demand for that stock. The target stock price is an estimate that an analyst believes will be the current price at some point in the future, generally 12 months from now.
|Target Price||Current or Market Price|
|What an analyst thinks the stock price will be in the future||The stock's current price on the open market|
Pros and Cons of Price Targets
Give you an indication of a stock’s value
Help inform investment decisions
Analysts may disagree on price targets
No guarantee of price movement
Price targets can give you an indication of what others believe a stock is truly worth. This can help inform your investment decisions, but you shouldn’t rely solely on a price target to make a buy-or-sell decision. Price targets are just informed estimates. Analysts do not always agree with one another, and there’s no guarantee that a stock will reach its price target or move in the same direction as the target price.
How To Find Price Targets
Price targets are readily available online. Some brokerage firms provide them as a service to investment clients, and you can also find them on your own through a paid investment research service. Free options include those offered on Yahoo! Finance.
- Price targets are estimates of what analysts think a stock is really worth.
- Price targets reflect what the price is expected to be at some point in the future, often in one year.
- Investors and traders may incorporate analysts’ price targets into their own investment analysis.