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What is an Initiating Coverage Report ?
Let us say that Mr Sharma has been saving for a dream house for a long time and now he wants to buy it. How would he go about this entire buying process? Mr Sharma went to his friend who has a fair knowledge of real estate and asked him about the area, locality, and position about various houses. His friend hands him over a list of builders who have recently constructed houses recently and asks Mr Sharma to find out about the builders and their reputation. Upon researching, Mr Sharma comes across various reports on the builder and the kind of properties they have been building. He goes through the reviews of people who have bought the property and the rate of increase in investments.
So what is Mr Sharma doing? He is now looking for experts' opinions to understand where he should buy his house so that he gets maximum profit from his purchase.
Similarly, there are experts hired by firms who publish long reports, ranging from 50 to 100 of pages when they cover a stock. The experts also known as an analyst express his or her opinion on the stock. This entire process is called initiating coverage. The information received in initiating coverage helps in making better investment decisions. Let’s dive in this topic further and understand some important terms.
What is initiating coverage?
To ‘cover a stock’ might have two meanings. One can be that the research department of a broker-dealer will have a range of stocks which they’ll cover; therefore, they will give buy, sell, or hold recommendations. The other meaning of ‘cover’ can be that purchasing a stock which one has already sold to cover one’s short position in that stock. Initiating coverage refers to the former meaning.
Financial media uses the phase ‘coverage initiated’ to announce that a brokerage or analyst issues their first rating on a stock. Going forward, an analyst will continually publish on the stock.
How does it happen?
The brokerages in full service and investment banks employ analysts to follow and study various companies. The recommendations issued by the analyst are passed on to broker clients and others. When the coverage of a company is initiated, the brokerage has an opinion on it.
What is the use of coverage initiated?
The coverage initiated is for either a highly visible company or the one who has gone public or after the stocks of a company have been available for a while, and it has succeeded for institutional investors to care about its detail and business. The company is likely to not receive any official analyst rating before the initiation of analyst though usually a lot of press and media have circled the company in its later phase of growth.
What is the role of an analyst?
Analysts issue the recommendations on a stock passed on to clients and others. When a brokerage starts to cover a company, it means that the company will now be followed by the firm and the brokerage will give its opinion on it.
What is the coverage initiated and price target?
The analyst will arrive at a specific target in his or her report. The analyst concludes these numbers by using particular key drivers like sales. In a discounted cash flow model, the analyst will begin by projecting a company’s future free of cash flows. To arrive at a value estimate, the analyst from here will discount them.
The present value becomes the price target. In case the value of the analyst arrives at through DCF analysis is higher than the current share price of the company, they’ll mark the security as underpriced. After which they’ll issue a ‘buy’ rating if the present value estimate is lesser than that of the market price. They could also initiate by marking the security as overpriced and issue a ‘sell’ rating for it.
What is the stock selection?
An investigator can just follow, or cover, endless stocks. Yet, the composition of a specific stock gathering or area continually changes. A few organisations leave the business or are gained by others; new organisations enter the field. Periodically it gets vital or profitable to add another stock to the research list. At the point when that occurs, the firm initiates coverage on it.
What is the effect of initiating coverage on stock price?
The impact of coverage initiation on stock price differs. It relies upon the expert, the stock and the connection between the financier firm and the organisation and the stock rating/proposal. If the analyst has a decent history and his inclusion is excellent, the stock cost may progress. On the contrary, if the broker underwrites the stock in an initial public offering, and the analyst emerges with a negative recommendation, the price may drop.
What is institutional buying?
Many institutional investors prefer to buy stocks covered and recommended by the analysts. When the coverage initiates, they are likely to buy the stock for the first time, pushing the price higher.
What is free advertising?
The brokers charge for conducting good research. Even though the coverage initiated are widely announced to generate new business and profit, you would have to become a client or subscriber in order to get the updates and changes provided by the analysts.
Now you are a pro in initiating coverage! In the next chapter we will discuss, How do Dividends, FPOs and Rights Issues impact stock prices?
A quick recap
- When the research department of a broker-dealer covers a range of stocks which; therefore, they give buy, sell, or hold recommendations, it is called initiating coverage.