What is a Price Target?
How Does a Price Target Work?
For example, let's assume that the Jones-Smith investment bank provides research reports about Company XYZ stock. The Jones-Smith analyst studies the industry, Company XYZ's competitors, Company XYZ's products and management, etc. The analyst creates a financial forecast for Company XYZ and determines, based on that forecast, that Company XYZ stock is worth as much as $10 per share right now, even though it's trading at $7 per share. The Jones-Smith analyst therefore sets a $10 price target for the stock, meaning that she expects Company XYZ shares to rise to $10 in the near future (the analyst might also advise investors to sell the shares once they reach $10).
Why Does a Price Target Matter?
Price targets provide insights to investors, but they also provide instruction about when to buy and sell. Additionally, price targets (if widely-followed) can also provide indications about when most other investors are going to buy and sell, which makes for potentially lucrative trading strategies.
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