When I started my journey in the stock market, even I was not sure of a few terminologies related to this new world a decade back. But with time, experience, & determination we can excel in any field. Our sole motto is to advise you how you can make maximum profits so you should know these terms to decide better. In this series, we will discuss What is the Target Price in the Share Market?
As the name goes, a target means a goal set to achieve. It is the best-estimated price for a stock on the basis of earnings forecasts and assumed valuation multiples. The target price is a price that represents the best possible outcome for the stockholder’s investment. When the Target Price is reached, the investors or traders simply sell their stocks, believing that they have received the most likely reward from those particular stocks.
The target price is determined by the investor’s risk tolerance and the time horizon for which he is willing to invest. To gauge the right opportunity to sell the stock and book the profit by determining the target price. Instead of relying on the stock rating which is based on the opinion of experts can differ. Most importantly, a rating may not apply equally to every investor. As everyone has different investment goals and risk tolerance levels, which is why target price determination is important in rounding out research.
A good target price takes into account four factors. These factors are EPS, EPS forecast assumptions, valuation multiples used to calculate the target price, and assumptions used to justify the valuation multiples used. Investors should disregard the target price report if it lacks all of them, as it could be a pump-and-dump marketing ploy.
For example, two different stock traders own stock for the same company at Rs.1000/. They may have different investment objectives in terms of the net profit that they can generate from these stocks. One trader might set his target price at INR 1250, while another might set it at INR 1700. Considering the time horizon they are ready to put in will determine their profit.
Hope you are now clear what will the target price for the stock you are ready to chase to book your profit!
Also Read What is Bonus Share?