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A fundamental analyst can use their valuation knowledge and skills, comparing past earnings with projected earnings, to arrive at a fair future value for a stock, known as a price target. A technical analyst, on the other hand, can use support and resistance levels to identify reasonable target price zones. In stock investing, a target price is the price at which investors exit their position and collect their full reward.
How to set a price target
Note that a stock can have several price targets. Different analysts use different valuation methods, and economic data viewed from different perspectives will produce different price targets.
>>> Common valuation methods and how to apply them.
Example: two investors both hold CEO shares, which are trading at VND 40,000. They have different views on the business, especially on the trend of the stock they are looking at. One might decide to set a price target of VND 50,000, while the other might choose a higher target, say VND 65,000.
In technical analysis, investors use tools such as support and resistance, Fibonacci levels or moving averages to identify target price levels where a reversal may occur, so they can take profit.
How price targets work
To understand how price targets work, consider a real-world example: analysts at investment bank Y research Company A, looking at factors such as its products, business model and management capability. Finally, they publish a detailed research report on Company A, with the aim of determining the value of its shares. Suppose each share is valued at VND 35,000 but is trading at VND 20,000 in the market. The analysts may therefore expect Company A’s share price to rise in the future.
Based on this analysis, investors buy Company A’s shares and set their price target in line with the forecast, placing a take-profit order at VND 35,000. When the share price reaches VND 35,000, the sell order is triggered and the trade is closed.
Why are price targets important?
Analysts set price targets to give investors a view of the potential profit. Price targets tell investors when to exit a position: they sell part of their holdings to realize their profit.
Besides showing when to sell, price targets also help investors know when to buy and hold a stock. This makes them an excellent input for building suitable, profitable trading strategies.
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