Most brokerage houses in their research reports rate a stock, big or small, after certain events such as results, acquisitions, demergers, managerial changes and actions and so on. Such reports help an investor understand the implication of various events on a company’s earnings.
But often different brokerage houses may give similar sounding ratings. For example, a brokerage firm may give a “buy” rating for a stock that posted stellar results, while another may give an “accumulate” rating for the same stock. Yet another firm may give a “hold” rating for the stock. Similarly, a stock that is hammered at the stock market may get a “sell” rating by some brokerages and “reduce” by others. While buy, accumulate and hold ratings sound similar and so do sell and reduce, they do not mean the same thing.
There are subtle differences between these ratings that you must know if you follow recommendations from brokerage firms. By giving a particular recommendation, the brokerage is estimating that the stock price should move up or down by a certain percentage.
Buy vs accumulate
When a broking firm gives a buy recommendation, it means that it is positive on a stock and one should buy into the stock at the current price.
An accumulate recommendation, too, means that the broking firm is positive on the company and the scrip is attractively priced. However, here the buying needs to be a little more nuanced. By accumulate, brokerage firms mean that you should buy the stock in a staggered manner at every stage of small corrections.
Sell vs reduce
When the rating is sell, it means that you need to completely exit the scrip immediately as there is a lot of negativity around the company. A reduce recommendation, on the other hand, means that you can partially exit the scrip. In other words, short spurts in the scrips should be taken as an opportunity to exit.
This rating is better than sell, but worse than buy. It denotes that there are minor negatives with regards to the stock. So if you own a stock with a hold recommendation, you need not sell it, but you should also stay away from buying more of it. If you don’t hold the stock at all, stay away.
What should you do?
Almost all brokerages come out with research reports these days. While it is safe to assume that a rating can be followed if a stock has been rated similarly by several brokerages, these should not be followed blindly. If you intend to hold a stock for a long period and are convinced about the fundamentals of the company, in any case, you need not bother much about these ratings.