recommendation
Recommendation is an analyst's advice on whether to buy, sell or hold a stock, based on their study of the company and its prospects.
In plain English
Think of a recommendation like the advice your well travelled uncle gives you before you enter a business. He has seen the market, he knows the players, and when he tells you which stall to buy from, you listen, but you still check the goods yourself.
That is exactly what a stock recommendation is. An analyst at a stockbroking firm or investment bank studies a company closely, its earnings, its debts, its plans, its competitors, and then tells the public whether they think the stock is worth buying, holding onto, or selling off.
In Nigeria, you might see this when a firm like Chapel Hill Denham or Meristem publishes a note saying they rate MTN Nigeria a buy, expecting the price to rise because of strong data revenue. That note is a recommendation, and thousands of investors on the Nigerian Exchange will read it before deciding what to do with their money.
In the United Kingdom, you would see similar notes from firms like Peel Hunt or Numis on companies listed on the London Stock Exchange, rating something like Tesco a hold because the price already reflects the good news.
Someone in the diaspora sending money home to invest through a Lagos based broker might rely heavily on these recommendations, since they are not walking past the company's shop every day to see how business is going themselves.
The thing to remember is that a recommendation is an opinion, dressed up in research and numbers, but still an opinion. Even the best analyst gets it wrong sometimes, because markets are moved by things nobody can fully predict, like a sudden policy change or a global shock.
An analyst issues a buy recommendation on Zenith Bank at ₦42 per share, expecting it to rise to ₦55 within twelve months based on strong profit growth. An investor who trusts this may buy 1,000 shares for ₦42,000, hoping to sell later at the target price for a profit.
Questions people ask
Should I always follow a stock recommendation?
No. Treat it as one useful opinion among several. Read the reasoning behind it, compare it with other analysts' views, and think about your own goals and how much risk you can carry before you act.
Who writes these recommendations?
Usually research analysts working for stockbroking firms, investment banks or asset managers. They study a company's financial statements, industry trends and management plans before forming a view.
What is the difference between a buy, hold and sell recommendation?
A buy suggests the analyst expects the price to rise, a sell suggests they expect it to fall, and a hold suggests they think the current price is fair, so there is no strong reason to buy more or sell what you already have.
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