Researched stocks recommended by experts
Brokers know that you want researched stocks recommended by experts. That is why you came to them to begin with. Each brokerage house, therefore, has its own experts rating stocks just for you. When brokers rate stocks, on average more than 65 percent are rated buy, less than 35 percent are hold, and less than 1 percent are rated sell. Every broker, therefore, has a long list of buys to show you, several of which are certain to piqué your interest.
Unfortunately, buy ratings have a dual purpose. Buy ratings sell stock to you and they sell services to companies issuing stock and bonds. In 2000, brokers made more than $30 billion dollars helping companies issue stocks and bonds. These stocks and bonds are always given buy ratings. That keeps the client coming back; it may or may not keep you coming back.
Studies show that buy-rated stocks have random returns on average no better than the market. Frequently they serve to prop up stock prices temporarily so insiders can cash out their stock options at a profit before the collapse. Insiders have to act quickly, though. According to a 2001 study by Investors.com, buy ratings on IPOs by the analysts of the underwriting firm lead to losses six months later of greater than 50 percent.
Investors also go to their broker for comfort and support during the markets down periods. Unfortunately, a full-service broker is not a financial counselor or a psychologist, but a salesperson looking for a commission. He will always have a product to sell you in an attempt to ease your discomfort.