Share prices typically go up, down or stay the same depending on how a company performs versus market expectations. If ABC plc is forecast to make £3m of pre-tax profit but delivers £2.8m, the stock is likely to fall on such news. Similarly, it ABC makes £3.3m, expect the share price to rally.

But how does the market establish its expectations?

NUMBER CRUNCHERS EARN THEIR KEEP

This is where City analysts come in. Setting forecasts is an important part of their stock markets function and it is among the key jobs they do to earn their brokerage fees.

To predict future revenue, profit, earnings and dividends, analysts use several techniques:

- Most analysts start with an in-depth financial model, often in a spreadsheet. This model will usually contain every line item of a company’s financial statements - the profit and loss account, balance sheet and cash flow statement - over the past five to 10 years.

- An analyst will develop his or her own views of how things will look in the future through a combination of factors. These will include extrapolating past trends, looking at how similar companies have been doing and talking extensively with company management. This gives the analysts a thorough understanding the business and its markets.

- To refine these models, the analyst will likely conduct channel or peer group checks. This means talking to a company’s suppliers, product distributors, customers and competitors to assess how well its own products or services are selling, and how well pricing in an industry is holding up.

Businessman Working Finance Data Planning Concept

HOW TO GET ACCESS

This research is proprietary, so it remains owned by the analysts and their employers. While a few are quite good at making their research accessible to ordinary investors; most don’t, restricting access to financial institutions.

That is another good reason to read Shares. We have nurtured good relationships with many analysts and research houses, and do our best to pass on that collective analysis to users.

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Issue Date: 01 Sep 2017