This is the projected price of a financial instrument as provided by an analyst and when it’s achieved, the trader is able to attain the best possible outcome from an investment.
In other words, it is the price at which a trader or investor exits a trading position finally achieving his or her reward. It can also be defined as the price at which a security is valued by comparing its historical and projected earnings.
What you need to keep in mind is that several price targets can be set for a single stock. It is common for different valuation methods to be used by analysts and financial firms where varying economic forces are taken into account when it comes to determining price targets.
For example, we have two traders who are currently holding a stock that is trading at $50. Both traders differ in terms of opinions especially when it comes to the direction of the stock they are watching. One of the traders may decide to set a price target of $70 while the other trader may opt to set the price at $100.
By now you already know that traders and investors utilize trading indicators like support, resistance, Fibonacci levels and moving averages in order to determine the direction of the market.
By using any of the indicators listed above, both traders and investors can be able to indicate their specific price targets thus achieving their objectives in the end.
How Price Targets Work
To understand how price target works, here is a real world example. Imagine you have an investment bank called Lime. Analysts working at Lime Investment Bank will conduct studies on Company A competitors, products and management among others.
Finally a financial forecast will be developed by the analysts for Company A. This is done to determine the worth of Company A stock. Let’s assume the stock is worth $5 per share at the moment but it trading at $3. As a result of the analyst’s forecast regarding the rise in price of the stock in the near future, the price target is set at $5.
Traders and investors will set their prices according to the forecast provided which means they will set a price level of $5. When the stock price attains $5 price, the system will trigger a sale thus exiting the trade.
Why Price Targets Matter
What you need to know is that price targets are used by analysts to provide insight for traders and investors. Thanks to price targets, traders and investors know when to exit a position. As a result, they will sell a number of shares in their possession thus earning a profit.
Apart from providing insight on when to sell shares, the indicator helps traders and investors to know when to buy particular shares. This makes the indicator a great factor that offers lucrative trading strategies to traders and investors.
Final Thoughts
Price targets are vital indicators in trading as they help to project the price level of a stock. As a result, investors and traders are able to determine when to buy or sell.
Analysts utilize financial reports plus they take into account different economic forces finally providing the correct forecast. If implemented with the right trading strategies, traders and investors are assured of reaping a lot of gains.