Brokers will often set target price on shares that they cover. The target price is simply a projected share price and represents a possible ‘best time’ for an investor to sell or exit on their respective investment.
In setting a share target price, analysts rely on a subjective forecast processes. Two common methods used by brokers when setting target prices are:
- Discounted cash flow analysis – forecasts are created years in advance, making assumptions about discount rates to produce a per share value.
- Comparison of peer group – brokers may apply higher earning multiples in companies in the same sector due to belief of superior growth prospects and related positive indicators.
As these methods are subjective in nature, investors will often find target prices varying between brokers.