Should You Listen to Stock Market Analysts?

By nature, the stock market is unpredictable. In the US, highs and lows can be influenced by corporate news, black swan events, and even social media—as evidenced by Elon Musk's Twitter poll on whether to sell 10% of his Tesla (NASDAQ:TSLA) stock.

Because of the market's unpredictability, investors seek answers where they can find them. One of those ways is through Wall Street analysts who set price targets for certain individual stocks.

What are Wall Street analysts?

Wall Street analysts study company fundamentals to come up with long-term price targets for stocks. Based on the stock's current market value, those price targets can tell us whether a stock is likely to go up or down (and by how much).

How stock market analysts come up with price targets

Analysts use materials like SEC documents, earnings reports, and other financial information to help come up with price targets. These price targets tell us whether an analyst recommends to buy, hold, or sell a stock.

Where to find stock market analyst predictions

Websites like TipRanks curate analyses from Wall Street professionals. On TipRanks, you can enter a stock's ticker symbol and see what the consensus of analysts says about the stock. The larger the pool of analysts and the more recent the analyses, the better.

For example, 19 out of 21 stock market analysts agree that Alibaba (NYSE:BABA) is a strong buy. The average 12-month price target is $239.79 per share, a 44.5 percent increase from the recent market value of $165.81.

Most of these analyst recommendations were published in the last three months, meaning they're fairly recent but still not within an ideal time frame. After all, the stock market moves quickly.

What to look for in a stock market analysis

Here are a few questions you can ask in order to determine whether you should listen to a Wall Street prediction:

• How recent are the recommendations? If they're more than a few months old, the suggestion could be wildly outdated. The company is likely to have had another earnings report already.

• Who's supplying the analysis? Analysts can be hired by a brokerage (sell-side), fund manager (buy-side), or independent (not employed by an institution).

• What does the data say? If your own fundamental considerations oppose analyst predictions, you may not want to listen to the price target on the screen.

Should you depend on Wall Street price targets?

Ultimately, a Wall Street prediction can serve as a valuable tool in your toolbox. However, it should not be your only tool. Develop a strategy that takes into consideration expert forecasts, news, earnings, stock performance, company fundamentals, and more.