Whether the stock market is on a raging bull market or going through one of its common corrections, there are analysts hard at work. They cover individual stocks, bonds, funds and the entire market as strategists. While most analysts share the same goal — to evaluate the investment worthiness of a company — their methods and practices can vary widely. Analysts also tend to bunch up their coverage on large and popular stocks, leaving little room for a company to surprise the market with uncovered news. It also leaves many companies open for discovery. If most of the analysts are covering the big stocks, it’s up to the smart investor to find the next undiscovered stock. (Thinking about relying on analyst recommendations for your next trade? We’ll show you what to watch out for. For more information, read What To Know About Financial Analysts .)

The Business of Analysts

So why are more than 20 different analysts needed to cover one company if companies are not allowed to provide any insider information to anyone? You also have to wonder how much analytical work one would need to actually do if so much has already been done. One of the problems with so many analysts is that there are certain times in economic cycles when because of uncertainty, many analysts estimates fall within narrow ranges. This can be particularly odd as many analysts tout their earning estimate models as being better than the rest. While this is a little suspicious at times, the quarterly reported numbers are often close to the average of all the analysts’ estimates.

While this makes the analysts look like they are doing a pretty good job of covering these companies, how can they really add value? You can’t pick up a financial newspaper or turn on the financial news without hearing about earnings surprises . That’s because earnings surprises can drive a stocks price movement up or down. If all the analyst does is report the publicly available news, you might as well just buy the company and ignore the analyst. The good analysts who dig deep into research do add significant value, but you have to read beyond the headlines. Although analysts implement superior models and further research than what is common to the every-day investor, analyst estimates are often immediately reflected in the share price of the covered firm. (To learn more about earnings surprises, read Surprising Earnings Results .)

While some firms still stick to the straight forward buy or sell, many have changed to a more complicated system of numbers, letters and ratings such as strong buy. You can see initiate coverage, market perform, market underperform or even neutral as a rating. The numbers and letters are a little easier to read and more black and white. For the average investor, here is a good rule of thumb: if an analyst has any bit of positive language in their rating, it’s their indirect way of saying buy the stocks. So if you trust that analyst, buy away. Once the language starts moving even slightly negative you can assume that is as close to a sell call as actually saying it. This range of ratings makes it easier for analysts to be kind of right or wrong and takes some of the pressure off of them from calling the tops and bottoms. In the volatile times, you need to catch the subtle clues.