damoche07:

.

Nope?had some contraints with my broker.i am changing him soon sha.Planning on joining Afrinvest this december.Problem is i don't stay in Lagos and can't afford a working day yet.I will drive myself crazy if i have to do everything i see on this thread.

@ damoche

you can contact afrinvest, get their account details and transfer the amount .You can SCAN your details to them .They will need some verification from your bank.

@ AKtopgun

  it's officially been diagnosed, diamouthed , you are positively addicted to this space. Lotsa good wishes to madam and your heir apparent. Goodluck  !

--------------------------------------------------------------------------------

Congrats oh. I trust that you have written the marking script for them. All the best. We go wash am oh


@ Frankiriri ,

thanx a mil , i don try .CFA no be yam o ! its a marathon ,not a sprint but we will get there. Its been a wonderful though stressful experience. Have a good week.

@ Windy wendy ,

Took a second look at the Bagco prospectus after the exam .You just blew me away with your analysis .It essentially reconfirms the  info  i have , though  miles away  from yours. Have a wonderful week .

@Jehosaphat ,
             you sure got your radar on every potentially good firm on the NSE . this is the kind of high levels of cholesterol you want to have .Keep it   coming.Nice  one !

@ Newbies

    Steps to profitable investing.

    As an investor you have to WRITE and DEFINE your goals ,more like an Investment Policy Statement : this is the very first step before you make your first purchase .Determine what percentage of profit you want to realize and loss you can take , set your time horizon etc
  Am sure we all want to invest in a "good "company ,but then how do you define one , for me the parameters for a good company are :
 
1. LONG-TERM EARNINGS POWER
2.GROWTH POTENTIAL OR OPPORTUNITIES
3.ABILITY TO PAY DIVIDENDS

#3 may seem meagre because of the small dividend yield the companies declare but those small sum become a lot over the years especially if you reinvest them.  To identify a firm with these factors, you need to do some research. Find out much income the company you are interested in have declared as PROFIT AFER TAX, especially in the last 5 years . Now you are stepping up the research into Company analysis :
you use this analysis to identify the best companies in each sector orT industry. while company analysis may tell you the best firms in an industry . THE BEST FIRMS DONT NECESSARILY IDENTIFY THE BEST INVESTMENTS , a lot depends on the entry price and circumstances. Like my professor would say , a good company might be overpriced , while a bad company might be underpriced and represent a better investment. My advice , stick to the good companies for now as you learn, but remember THE PROFIT IS MADE WHEN YOU BUY ,not necessarily when you sell.

To select the best stocks, you have to answer 2 questions :

1. What are the best companies in the sector , and what profit margins can be reasonably projected ?
2.Are the stocks priced correctly ?

  At this point you will need to crunch the numbers , do some valuation. One of those techniques is the P/E ratio , Price to Earnings ratio. Thats the ratio Pumping 777 , Easimoni and the rest use to answer #2 question. The ratio compares price to Company earnings to determine if it is correctly priced or overpriced. Mostly the P/E ratio is useful , but sometimes it can be rendered useless if earnings are negative , i mean if the company made a loss.There are other valuation tecniques which can be used . we can take it from here some other time . Happy investing.

LAST WORD : IF YOU ARE NEW AND YOU NEED A FLYING START , READ THE GURUS POSTS AT LEAST 3 TIMES, the pointers are right there, then you can ask direct questions on what you need to know. Have a profitable week.

@all newbies , wrote this a few months ago on another forum. you might find it useful.





i want to share my experience with you all, started investing in the stock market only a few months back and its been some learning experience for me. As you can imagine i started out as a novice with very little idea on how to pick stocks.I picked stocks on recomendation of people i assumed should know .I made some gains and losses. On hindsight i figured how i could buy a stock like Transcorp ,without fundamentals. I simply bought based on the Hype and Noise.If Transcorp turns out to be good, i still made a wrong decision .That made me realize how much i needed to educate myself.


Talking about investment education , i realized one needs to acquire the skills to conduct Fundamental analysis ,Technical analysis and some basic market tools like market ,limit ,conditional orders etc

Fundamental analysis deals with the measurement of a firm's profitability and efficiency.Am sure we all want to know how the firm makes money, the growth rate and if the growth and profit is sustanable.In order to evaluate a company , we need to be able to ANALYSE the financial statements , we can intepret the balance sheet ,which tells us the financial position at a given date ,the Income statement, shows the how much profit or loss has been made.Further the Cashflow statement shows ,the source and uses of Cash by the company.There are other sources of information that helps in analyzing a company's fundamentals like the financial footnotes etc

To evaluate a firm , the use of financial ratios are useful.Ratio is simply, the relation of one item to another.In order words we use ratio for comparisons. Financial ratios are no good in isolation , we have to use them in comparisons. It can be used to compare
Firms in the same industry,
the company's perfomance relative to the economy as a whole
the company's own historical performance.

Financial ratios are very important because they reveal trends about a firm over time. One needs to be able to compute the perfomance ratio and understand the story the financial statement is telling you.It is not difficult to acquire the skills , all you need is your disposition to learn what could potentially make you more money.

Since the price you pay for the stock,plus broker fees,is the present value of all the future cashflows from the stock ie dividends,bonus issue.
You want to be sure the company will be making money in the future.The way to determine that is by conducting an analysis of the financial statements.There is a story behind the numbers, its our job to interpret the numbers. It is very important ,because the financial statements
and prospectus are prepared by management of company , hence the need to scrutinize them .Dont forget its your money you are about to put through some business risk.

Finally ,

i hope this serves as a motivation to study investing because these pages are not enough .If you do not study the basics of investing it will be difficult to follow the posts here and use the information appropriately. Without the basics ,there is no future in investing. Father of 2 is a short term trader but he trades in fundamentally sound companies.Windy Wendy , Wanaj0 are long termers but they take profits when the market presents the opportunities. Easimoni , Pumping777 , Temmie 10 , Rought cut etc all analyze P/E ratios and other earnings multiples , without the know-how , its hard to get ahead .My point , studying investing is your big ticket to wealth. I am using it , still learning and it works like magic. Your secret to riches are in pages of investing literatures ,not only on these pages. Give it a think.

Dear all ,
   
allow me do some recap here ,

november was a great month ,especially on this thread . The magnanimity of  the regulars here got into gear 6 , Father of 2  showered short-term  traders with his time tested strategy of quick entries and exits . The middle of the month saw them insurance stocks take over the market with all insurance stocks opening higher than previous day's close. Pumping 777 and Easimoni and Temmie 10 kept everyone alert before the insurance bull bolted. Shigidi , yodiyokun aktopgun et all kept it real with updates and comments. Pumping pumped us up with his spreadsheet , while Wanaj0 took it further by unleashing that cache of info .Easimoni took a short leave and Guess WHO'S back , mama wendi . All them great guys, Roughcut ,Frankiriri ,etc forgive me if i can't  mention everyone's name , your contributions are greatly appreciated.  One last word , lets remain focussed on the 'koko '  ie the crux of the thread, lets separate facts from opinion , keep our posts civil and avoid confrontational  inputs. I guess everyone loves being appreciated . You are all affecting people accross the globe. lets push our generosity to another level . thanx 2 all N'landers , and to Seun for this thread.

Thanks, barge but what a name. A barge is now a very unsafe transport vehicle in my industry nowadays o courtesy of MEND. Will alaways remember u for your view that day WEMA released that bad results and there was panic.I remember u saying they might be releasing the bad news first. You were proved right.How is the Iberian Pennisula :


@ Damoche 07

sorry for the late reply , just finished my exams. Spain is fine and malaga is still sunny in december. Barge is a nick a friend carved out of my name and it stuck . Funny to realize its got some other meaning.Anyways, we are safe on this thread. Hope you are having a swell weekend.

@Damoche

So far ,so good. Thats what i can tell you about Afriinvest, they execute my mandates quickly , they are the best of the brokers i have ,though i joined them recently .Only downside , the website is udergoing some change. But a lot depends on your RM ie relationship manager .You will need to have a good relationship with whoever that happens to be. They are quite good. Goodluck .

@Wola ,

since you are new to investing in stock , it is better you have a medium to long term investment timeframe so you can make  good returns.With your portfolio you will do well but 400% profit by june 2008 is not feasible.You may however make over 50% because of the expected bull run in the first half of next year. With your 300k ,i will advise you buy 1or 2 insurance stocks where you have high probability of capital appreciation  before your timeframe.My point , you cant reasonably expect 400% in 7months timeframe, unless you are an expert and experienced  trader.  Iadmire your quest for more knowledge but you might want to add INVESTING to your curriculum.
 Genarally , the shorter your time frame , the greater your risk and the shorter your potential retuns, other things being equal . Goodluck !


@Jehosaphat ,

compliments of the season and thanx . Am sure you are smiling as your Japaul shares keep going north.

@ Wanaj0

 nice one with da spreadsheet. Rain no dey fall hit one part to the exclusion of the others !!!  


@ windy wendy

 howz da lil one , nice to have you back. gast to go my exam is on sat.

@Pumping

pass the goodie to a brother. thanx

@Pumping 777

nice one ! as per da spreadsheet. U go pump millions , amen . And da whole house too !

@ yodiyokun

still got some Law Union left , will wait till friday , before making a decision about the trend.Whichever i think it has found its price range.

@ all

Skye bank will be on T.S soon, just confirmed the P.O from my source in naija.

@ Easi ,

ma binu , inu buruku oni bi e . coolu temper !!!

Pumping777 ,

na wa oh , of all days you chose to enter the market on the 13th !!! Coolu temper , guys appreciate you for sharing so much info. E gba gbe e , o ti lo . Ja mi si da next stock on your radar .

@Father of 2

 obviously you enjoy spicing up the thread  with your comments. I will repeat again, i appreciate your style and it is practical , however it aint for everyone especially the beginners. In the short term , they will fill their pockets with non  spreadsheet money ,but in the long term they would have learn little. Your strategies are perfect due to the inefficiencies in the market.This will definitely change and the best way to Teach is to continually put an INVESTOR'S ADVISORY - only for the tried and tested. You cant teach what you learned in three years in a few lines. Finally, please leave the offshore part outta your posts, its kinda divisive, geographical location has nothing to do with it. Again , i like your style , keep it coming .I have learn more than a thing from you. What a prolific siucide bomber you are !

 @ Pumping 777 y los demas

your analysis is invaluable and helps in a big way.


@newbies,

 there is no way forward other than to study , yes i mean study investing ,not only read these pages.There are enough resources to help you all.

Finally make i borrow GEORGE SOROS words "it does not matter whetther you are right or wrong , what matters is HOW MUCH YOU MAKE WHEN YOU ARE RIGHT and HOW MUCH YOU LOSE WHEN YOU ARE WRONG .

@ Pumping

you can get those details from newspapers. I read the C.I Leasing results from yesterday Business day's online edition. You can sign up @ PRESSDISLAY.COM . Go to countries, click on Nigeria , its the only Naija newspaper on the site. I hope you find it useful.




Growth= Retention Rate X ROE ! its not how much you earn , but how much you keep and invest and reinvest !!!

@ Frank iriri

na only you go sell the whole offer, your target pass Ovia's own ! no wahala , i wan borrow from peoples bank !







Owo legba osi ! Growth = RR X ROE !

@ all

 could resist the urge to chip in on the different  participants on the thread. Investing isnt like maths where we all must arrive at a single correct solution. The only situation where i would permit myself to be characterized as a fundamenatalist is on this thread ! Having said that , for all the analysis in the world , the technical aspect and the human sentiment and emotion involved can make the market appear senseless , but you just dont argue with the crowd. However ,you may siddon look until the prices look fair for you to enter. My point is  being a speculator is not bad , in fact when you mix it  with F.A YOU HAVE A WIN-WIN SITUATION. I almost always buy more than the units i need , so i can take advantage of any short term upswings ,but always with a restriction- the firm's fundamentals must be solid.

@ Father of 2

  your inputs are well appreciated. and you seem to have a way of profiting from the inefficiences of the market. Nice one indeed. the 'spreadsheet money " part was amusing . Finance majors call it UNREALIZED GAINS  and my boys call it paper money. keep it coming !

 @ Pumping ,wanaj0 , easimoni, aktop et all.

Owo legba osi !  G= RR X ROE  !

@ all

the current on the thread is a bit blue because of the crusader results . I am neck deep into the insurance stocks , so i feel your pain. My take on the situation is not to rush out of crusader if you have a medium to long term horizon. As an insurance proffessional , this is always a real possibility in the sector , this is the type of systematic risk that you have to take into account and the best way to deal with it is to hegde your risk position by spreading your position in the fundamentally sound insurance companies.

If you in for the short term ,by all means take your profits , however small and move on. But if you have a longer time horizon , when crusader takes a hit buy more , and spread your risk by buying other insurance company.If the charge issue, as per Crusader is true , it exemplifies the peculiarity of the insurance business.

as regards the Mtn PP , make i to play lottery this weekend , maybe i go fit win 2 million greenbacks . Na Very VERY private lacement , indeed .

@ Ololufemi

i  with you that zenith is a good buy but your recurring post about it is  sickening.I HOPE YOU KNOW INVESTMENT OBJECTIVES AND CONSTRAINTS DIFFER. what is good for the goose is not necessarily good for the gander. If this continues others may follow your example and the sanity on this thread will be compromised.

 @Father of 2
     greed is not necessarily a bad thing. In fact a little bit of greed is an eesential ingredient to become wealthy .

@ALL

na wah o , wetin ! this thread is already on a bull run,so many pages in one day.Sure sign that something has taken off. A word for all peeps buying into the insurance companies, MAKE SURE YOU BUY FUNDAMENTALLY STRONG FIRMS,thats the only way to get ahead.THE MARKET IS ALWAYS OVER/REACTING OR UNDERREACTING , if there is a word like that.Or you can simply follow the leads of PUMPING,EASIMONI , TEMMIE but mix it with the calm words from WANAJ0 .i have been positioning myself for a while and still going to get more but no later than tuesday. The effect of the insurance buzz should wear out when profit takers descend , SO DONT DONATE MONEY TO CHARITY BY ENTRING AT ANY PRICE, SET YOUR LIMIT ORDERS TIGHT .

A word for the newbies , you can follow the leaders by doing what they do but you dont have their knowledge , so invest in yourself, learn, learn and learn again , it is the only way y ou will be a zillionaire.

@ Easimoni ,
you really have an analytical mind which you share with peeps here. I WONDER WHETHER NA U BUY ALL THE CRUSADER WEY DEY SHELF TODAY ! I REALLY HOPE YOU HIT BIG TIME WITH THIS. gimme a link , will like some talk with you.

@ Pumping
thanks for all the good work.Na fight , i send you mail as per the PHB prospectus , i no see nada , i beg reply . Hope you had i good flight.

gAST TO GO , I have a simulated exam on sat.This CFA no easy o ! omo wase ori ise .

@aquita

 its good to know the basics of stock trading and investing and you will do well with the resources already suggested .Like Wanaj0 posted, that is all theory there is nothing like practising what you have learnt .Bottomline , you have to start mix theory with practice ,And be prepared for surprises because those books and websites didnt consider Naija's peculiarities .I HAVE A BOOK FOR YOU AND YOU DONT HAVE TO PAY FOR IT. IT CONTAINS THE EXPERIENCE , FACTS, OPINIONS of people KNOWLEDGEABLE and not so ,  Its got 145 pages and still going .You cant find a better book anywhere on the NSE. The authors are all over the world and they are generous people. You guessed right , read this thread from page 1. Goodluck !

@ all

thanx for keeping the thread flowing.

As per leverage , i use it real good and it works ,however it is very ADDICTIVE .The important thing is to use it with restraint ,but i certain scenarios its a win-win . My idea is always to divide the capital into tranches .I use some for short term trading , some for mdeium-long term .Though we are all geniuses after the fact , whoever borrowed to enter Dangote sugar should be smiling right now. There may not be other DSR out there , but certainly there are good candidates for leveraged position.

@ Rob-roy

as  per using debt financing to buy stocks , you have to do the maths properly. You have to add acquisition costs to the cost of capital you borrow. When you use debt financing you MUST MAKE MONEY BEYOND YOUR COSTS , otherwise you would have enriched the lender and your broker. For instance , the interest rate in Nigeria is anything between 17-23% , plus the brokers fees.Thats what you have to make to breakeven ,but if you have access to capital abroad you have a better margin of safety. The fed reduced interest rate in the U.S this week , and the Euribor , thats the Euro interest rate on short term debt was also reduced. If you learn the mechanics of debt financing properly and you have your analysis  right, YOU WILL CERTAINLY MAGNIFY YOUR EARNINGS. One advice , make sure it  is a term loan , ie you pay the entire sum at the maturity of the loan.As per the interest payments , do have an alternative cashflow to pay it periodically. Finally , the decision depends largely on your RISK PROFILE as an investor. Good luck .

@ easimoni

though i deduced from your posting that  are more a short-termer , i am surprised you dont use leverage . with your wema position ,i kinda think you can take big risks.Bottomline , if you are making money now , which am sure you are , you are can magnify your earnings. No doubt .

@ easimoni ,

i respect your opinion and always willing to read what you have to say. I read on the previous page that your portfolio is 80% Wema . You sure have a lion heart ,but as you said that was a recipe for high blood pressure. Abeg make ur pay and diversify fast , we still need you on nairaland. I didnt enter Wema in May because i had no results to analyze except my broker 's word to buy. Congrats , and like someone said "enjoy the loot " .Goodluck !

@ all

a few days ago i posted here that the Wema management does have a strategy , THE BIG BATH . I definitely stand by my theory that the management WHIPPED UP the stock price before releasing such a dissapointing result to mitigate the expected sell-off. What we are witnessing is EARNINGS MANAGEMENT. The M.D was deliberately MISLEADING. I expect some good news soon from them , but it i cant trust this management. However that does not mean there isnt gains to be made from Wema . For those who own wema , depending on the weight it represent in your portfolio, you will probably be best served HOLDING until the good news start filtering through. Please RE-EVALUATE your position when this all plays out .i hope you all smile when this is over .goodluck !

@ iwerebor ,

please leave insults out of your posts here.this space is for respectable people willing to share the knowledge and experience. the fact that some of us INVEST our time to read, learn , contribute and share ideas here should tell you this is not a space to trade insults. You mentioned that you got to know about stocks 6 MONTHS AGO . Well , i imagine you still have a lot to learn and i mean A LOT . Some guys here have been investing much longer and THEY ALL LIMIT AND LEARN FROM THEIR MISTAKES , you would do well to learn from their mistakes rather than characterizing generous people here as" lazy bones ". I will tell you i was a beginner like you some months ago ,but i have learned more in last months than 4 years at university. And the PRACTICAL KWOWLEDGE AND EXPERIENCE PEOPLE SHARE HERE IS INVALUABLE. Being an investor for 6 months dont confer you with the credentials to call nobody names. Having said that , you have made a mistake and you should learn from it. Happy investing.

@others

lets move on, stuff like this is going to happen when someone falls out of order. lets get on with more productive stuff.

@ yodiyokun

ma binu ! coolu temper !!

@Tmoni

i read from the previous page you have 400k of Wema @ average 9.10. If i were you i will divest half of it using a scale of the acquisition cost plus price.i mean THE LOWEST COST IN , THE LOWEST COST OUT , that way you can divest at the lowest loss posible to this position. Further you might think about the opportunity cost of hanging in or WAITING FOR WEMA ,the are other good offers in the primary and secondary market if you are in for the medium to long term. Further you should do a post -audit , that compute your loss, if any, and LEARN from it. That way you will be a better investor. Having said that , Wema could do well going forward ,the important question is if you are prepared to wait ,and how much do you one to keep in this stock.That's why i think you should divest half, thereby reducing your risk and freeing up funds for other opportunities. In ANY CASE , its your Call. goodluck !

@hbrednic

 i doubt the price will fall to  N6 , but you can average-down if you feel good about wema going forward. It depends on your timeframe and investment objective. The jury is yet to report on the results .It does not help adding to a losing position ,especially if you are in for the short term .

Dear all ,

   while Wema's result has been dissapointing , virtually everyone expects the price to go south in the coming days.However , i have a gut feeling the management of the bank actually has a STRATEGY ,which is THE BIG BATH  ,that is , they report all the bad news at once , take the hit  and later start filtering good news gradually. I dont own  a unit of wema but it will be a BUY if it falls low enough.The price upsurge of last week was probably to prepare the ground for the result , take the massive sell-off  such that the share price will not fall too low to the PRE- UPSURGE PRICE. The results are historical results and the relevant question is if WEMA can create value going forward.

 For those who have Wema , dont rush to sell if you have a reasonable margin btw your acquisition price and the market price . After the price has stabilized you may realized you have enriched your broker and the insiders ! Before you take the leap , consider this !goodluck .

@ all, i think its helpful to read this , got it from Proshare .Its adaptable to the Nigerian stock market though a lot of the info applies to the NYSE.The

bottomline is SHINE YOU EYES !



Analyzing Analyst Recommendations




Research analysts study publicly traded companies and make recommendations on the securities of those companies. Most specialize in a particular industry or sector of the economy. They exert considerable influence in today's marketplace. The incident with CSL stockbrokers with regards to the Access Bank Plc Public offer provides a template for such review.



Analysts' recommendations or reports can influence the price of a company's stock—especially when the recommendations are widely disseminated through television appearances or through other electronic and print media. The mere mention of a company by a popular analyst can temporarily cause its stock to rise or fall—even when nothing about the company's prospects or fundamentals has recently changed.



Analysts often use a variety of terms (buy, strong buy, near-term or long-term accumulate, near-term or long-term over-perform or under-perform, neutral, hold) to describe their recommendations.



But the meanings of these terms can differ from firm to firm. Rather than make assumptions, investors should carefully read the definitions of all ratings used in each research report. They should also consider the firm's disclosures regarding what percentage of all ratings fall into either "buy," "hold/neutral," and "sell" categories.



While analysts provide an important source of information in today's markets, investors should understand the potential conflicts of interest analysts might face.



For example, some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover, either directly or indirectly, such as through employee stock purchase pools in which they and their colleagues participate.



As a general rule, investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock.



Instead, they should also do their own research, such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC; to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances.



This article therefore seeks to discuss the potential conflicts of interest analysts face, and leverages on the New York Stock Exchange (NYSE) and NASD rules concerning analyst recommendations, and provides tips for researching investments.


Who Analysts Are and Who They Work for
Analysts historically have served an important role, promoting the efficiency of our markets by ferreting out facts and offering valuable insights on companies and industry trends. Analysts generally fall into one of three categories:



Sell-side analysts typically work for full-service broker-dealers and make recommendations on the stocks they cover. Many of the more popular sell-side analysts work for prominent brokerage firms that also provide investment banking services for corporate clients, including companies whose stocks the analysts cover.



Buy-side analysts typically work for institutional money managers, such as mutual funds, hedge funds, or investment advisers; that purchase stocks for their own accounts. They counsel their employers on which stocks to buy, hold, or sell and stand to make money when they make good calls.



Independent analysts typically aren't associated with firms that underwrite the stocks they cover. They often sell their research reports on a subscription or other basis. Some firms that have discontinued their investment banking operations now market themselves as more independent than multi-service firms, emphasizing their lack of conflicts of interest.



Potential Conflicts of Interest
Many analysts work in a world with built-in conflicts of interest and competing pressures.



On the one hand, sell-side firms want their individual investor clients to be successful over time because satisfied long-term investors are a key to a firm's long-term reputation and success. A well-respected investment research team is an important service to customers.



At the same time, however, several factors can create pressure on an analyst's independence and objectivity. The existence of these factors does not necessarily mean that the research analyst is biased. But investors should take them into account before making an investment decision.



Some of these factors include:

* Investment Banking Relationships — When companies issue new stocks, they hire investment bankers for advice on structuring the deal and for help with the actual offering. Underwriting a company's securities offerings and providing other investment banking services can bring in more money for firms than revenues from brokerage operations or research reports. Here's what an investment banking relationship may mean:

1. The analyst's firm may be underwriting the offering: If so, the firm has a substantial interest, both financial and with respect to its reputation; in assuring that the offering is successful. Analysts are often an integral part of the investment banking team for initial public offerings, assisting with "due diligence" research into the company, participating in investor road shows, and helping to shape the deal. Upbeat research reports and positive recommendations published after the offering is completed may "support" new stock issued by a firm's investment banking clients.

2. Client companies prefer favourable research reports: Unfavourable analyst reports may hurt the firm's efforts to nurture a lucrative, long-term investment banking relationship. An unfavourable report might alienate the firm's client or a potential client and could cause a company to look elsewhere for future investment banking services.

3. Positive reports attract new clients: Firms must compete with one another for investment banking business. Favourable analyst coverage of a company may induce that company to hire the firm to underwrite a securities offering. A company might be unlikely to hire an underwriter to sell its stock if the firm's analyst has a negative view of the stock.



*Brokerage Commissions — Brokerage firms usually don't charge for their research reports. But a positive-sounding analyst report can help firms make money indirectly by generating more purchases and sales of covered stocks—which, in turn, result in additional brokerage commissions.



*Analyst Compensation — Brokerage firms' compensation arrangements can put pressure on analysts to issue positive research reports and recommendations. For example, some firms link compensation and bonuses, directly or indirectly, to the number of investment banking deals the analyst lands or to the profitability of the firm's investment banking division.



* Ownership Interests in the Company — an analyst, other employees, and the firm itself may own significant positions in the companies an analyst covers. Analysts may also participate in employee stock-purchase pools that invest in companies they cover.





LESSONS FROM DEVELOPED MARKETS
The rules of the NYSE and NASD require analysts in some circumstances to disclose certain conflicts of interest when recommending the purchase or sale of a specific security.



As far back as May 10, 2002, the US SEC approved proposed changes to these rules, strengthening the disclosures that analysts and firms must make. The NYSE and NASD decided upon an implementation schedule of between 60 and 180 calendar days for the new rules in order to provide reasonable time periods for firms to develop and implement policies, procedures and systems to comply with the new requirements.



These rules implement key structural reforms aimed at increasing analysts' independence and further managing conflicts of interest. They also require increased disclosure of conflicts in research reports and public appearances. Key provisions of the rules include the following:



* No Promises of Favorable Research — NYSE and NASD rules now prohibit analysts from offering a favorable research rating or specific price target to induce investment banking business from companies. The rule changes also impose "quiet periods" that bar a firm that is acting as manager or co-manager of a securities offering from issuing a report on a company within 40 days after an initial public offering or within 10 days after a secondary offering for an inactively traded company.

Significance of the Change: Promising research coverage to a company will not be as attractive if the research may not be issued within the initial days following the offering.


* Limitations on Relationships and Communications — the rule changes prohibit research analysts from being supervised by the investment banking department. In addition, investment banking personnel are prohibited from discussing research reports with analysts prior to distribution, unless staffs from the firm’s legal/compliance department monitor those communications. Analysts are also prohibited from sharing draft research reports with the target companies, other than to check facts after approval from the firm's legal/compliance department.

Significance of the Change: These provisions help protect research analysts from influences that could impair their objectivity and independence.


* Analyst Compensation — the rule changes bar securities firms from tying an analyst's compensation to specific investment banking transactions. Furthermore, if an analyst's compensation is based on the firm's general investment banking revenues; that fact must be disclosed in the firm's research reports.

Significance of the Change: Prohibiting compensation from specific investment banking transactions significantly curtails a potentially major influence on research analysts' objectivity.


* Firm Compensation — the rule changes require a securities firm to disclose in a research report if it managed or co-managed a public offering of equity stocks for the company or if it received any compensation for investment banking services from the company in the past 12 months. A firm also must disclose if it expects to receive or intends to seek compensation for investment banking services from the company during the next 3 months.

Significance of the Change: Requiring securities firms to disclose compensation from investment banking clients can alert investors to potential biases in their recommendations.


* Restrictions on Personal Trading by Analysts — The rule changes bar analysts and members of their households from investing in a company's securities prior to its initial public offering if the company is in the business sector that the analyst covers. In addition, the rule changes require "blackout periods" that prohibit analysts from trading securities of the companies they follow for 30 days before and 5 days after they issue a research report about the company, and also prohibits analysts from trading against their most recent recommendations, subject to exceptions for unanticipated significant changes in the personal financial circumstances of the beneficial owner of a research analyst account.

Significance of the Change: Prohibiting analysts from trading around the time they issue research reports should reduce conflicts arising from personal financial interests.


* Disclosures of Financial Interests in Covered Companies — the rule changes require analysts to disclose if they own shares of recommended companies. Firms are also required to disclose if they own 1% or more of a company's equity stocks as of the previous month end.

Significance of the Change: Requiring analysts and securities firms to disclose financial interests can alert investors to potential biases in their recommendations.


* Disclosures in Research Reports Regarding the Firm's Ratings — The rule changes require firms to clearly explain in research reports the meaning of all ratings terms they use, and this terminology must be consistent with its plain meaning. Additionally, firms must provide the percentage of all the ratings that they have assigned to buy / hold / sell categories and the percentage of investment banking clients in each category. Firms are also required to provide a graph or chart that plots the historical price movements of the security and indicates those points at which the firm initiated and changed ratings and price targets for the company.

Significance of the Change: These disclosures will assist investors in deciding what value to place on a securities firm's ratings and provide them with better information to assess its research.



* Disclosures during Public Appearances by Analysts — the rule changes require disclosures from analysts during public appearances, such as television or radio interviews. Guest analysts will have disclose if they or their firm have a position in the stock; if the company is an investment banking client of the firm; if the analyst or a member of the analyst's household is an officer, director or advisory board member of the recommended issuer; and other material conflicts.

Significance of the Change: This disclosure will inform investors who learn of analyst opinions and ratings through the media rather than in written research reports of analyst and firm conflicts.



What Conflicts May Mean to You
The fact that an analyst or the analyst's firm may have a conflict of interest does not mean that his or her recommendation is flawed or unwise. But it's a fact you should know and consider in assessing whether the recommendation is wise for you.



It's up to you to educate yourself to make sure that any investments you choose match your goals and tolerance for risk. Remember that analysts generally do not function as your financial adviser when they make recommendations, they're not providing individually tailored investment advice, and they're not taking your personal circumstances into consideration.



Uncovering Conflicts
In addition to paying close attention to the disclosures that firms and analysts make, here are some steps you can take to assess whether and to what extent analyst conflicts may exist:


Identify the Underwriter
Before you buy, confirm whether the analyst's firm underwrote a recommended company's stock by looking at the prospectus, which is part of the registration statement for the offering. Note that firms are required to disclose in research reports whether they managed or co-managed a public offering. You'll find a list of the lead or managing underwriters in the pages of both the preliminary and final copies of the prospectus. By convention, the name of the lead underwriter, the firm that stands to make the most money on the deal will appear first, and any co-managers will generally be listed second in alphabetical order.


Research Ownership Interests
A company's registration statement and its annual report will tell you who the beneficial owners of more than five percent of a class of equity stock are. Research reports on a company must disclose whether the securities firm issuing the report (or any of its affiliates) beneficially owns one percent or more of any class of common equity securities of the subject company.



How You Can Protect Yourself
All investors are advised to do their homework before investing. If you purchase a stock solely because an analyst said the company was one of his or her "top picks," you may be doing yourself a disservice. Especially if the company is one you've never heard of, take time to investigate:



*When assessing a firm's research report of a company, be sure to read all of the disclosures about the firm and analysts' conflicts of interest and the types of research recommendations that the firm has made.

* Research the company's financial reports using the Proshare Report Central (which we are still begging companies to submit electronically) or call the company for copies. If you can't analyze them on your own, ask a trusted professional for help.

* Confirm whether the analyst's firm underwrote one of the company's recent stock offerings, especially its IPO.

* Learn as much as you can about the company by reading independent news reports, commercial databases, and reference books. The NSE research unit may have these and other resources.

* Talk to your broker or financial adviser and ask questions about the company and its prospects. But bear in mind that if your broker's firm issued a positive report on a company, your broker will be hard-pressed to contradict it. Be sure to ask your broker whether a particular investment is suitable for you in light of your financial circumstances.



Above all, always remember that even the soundest recommendation from the most trust-worthy analyst may not be a good choice for you. That's one reason we caution investors never to rely solely on an analyst's recommendation when buying or selling a stock.



Before you act, ask yourself whether the decision fits with your goals, your time horizon, and your tolerance for risk. Know what you're buying—or selling.