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Wednesday, 31 July, 2002, 10:23 GMT 11:23 UK
Q&A: What is a City analyst?
Q & A The role of the City analyst

The work of the analyst may be a mystery to most people but their conclusions are increasingly followed by private investors despite concern over a conflict of interests.

What is an analyst?

Analysts are employed by banks, fund managers and stock broking firms to study the performance and trading prospects of a particular firm or company sector.

They produce reports - often coinciding with the release of fresh company results - rating a share as a buy, sell or hold.

The reports produced by analysts can influence the decision of City professionals and private investors as to whether to buy or sell shares in a particular company.

So if an analyst says jump the stockbrokers and private investors jump?

Not exactly.

Ben Yearsley, investment manager at independent financial advisers Hargreaves Lansdown, argues that professionals are increasingly taking analysts reports with a hefty pinch of salt.

"I often question the motives of analysts that work for institutions that are also in the market to broker the shares of companies," said Mr Yearsley.

In America, Merrill Lynch Investment Managers promised to reform how analysts are paid and rate stocks after a 10-month investigation by New York State prosecutors.

Of special concern to the prosecutors was an alleged conflict of interest between Merrill Lynch share research and investment banking arm.

In the UK, the Financial Services Authority (FSA) has investigated the role of analysts in the stock market.

It found that buy recommendations made by firms acting as corporate brokers or advisers to the company in question was nearly twice as high as where there was no relationship.

So the reputation of analysts has been damaged as markets have fallen?

Partly, but Paul Kavanagh, partner at stockbrokers Killik & Co, argues that many investors lose out because they misunderstood the role of the analyst and what a buy recommendation means.

"A buy recommendation can mean that they see it as a good choice in that sector rather than a share that should be held per se."

So a buy recommendation means it is rated in its sector but not necessarily overall?

Yes, confusing isn't it? In addition, Mr Kavanagh argues that analysts are looking at a share as a long term investment.

Whereas, at the height of the bull market, many investors bought on the back of a buy recommendation in the hope of quick rise in the price - only to be left disappointed when the quick buck didn't materialise.

Can private investors easily get their hands on analyst reports?

Some reports are easy to access, others not. Although, investment banks post reports on the net, Mr Yearsley argues that the information available to private investors is a pale shadow of that which reaches the desks of City professionals.

"We get reports often the day after they have been written. In truth, private investors don't enjoy anywhere near the breadth of information that professionals can get there hands on."

See also:

07 Jun 02 | Business
25 Apr 02 | Business
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