# How to Understand and Calculate Stock Price Targets

## What Is a Price Target?

Price targets play a crucial role in financial markets, offering investors and traders a projection of where a security's price might head. As an analyst's estimation of a stock's future value, a price target serves as a vital tool in investment decision-making. Analysts determine these targets by evaluating a company's current valuation, historical performance, and potential earnings, aiming to predict the stock's worth over the next 12 to 18 months.

Despite being educated guesses, price targets can significantly influence investor actions, especially when issued by reputable analysts. Understanding how price targets are determined can empower investors to make more informed decisions about when to buy or sell a security.

### Key Takeaways

*   Price targets are analysts' forecasts of a security's future price, aiming to determine where a stock should be valued within 12 to 18 months based on historical and projected earnings.
*   Different analysts employ various valuation methods, including fundamentals such as P/E ratios, or technical analysis using price action and trends, to estimate price targets.
*   While widely used, price targets have an accuracy rate of about 30% for 12-18 month forecasts, highlighting them as educated guesses rather than certainties.
*   Traders and investors should consider price targets as one of many tools in investment due diligence, balancing these with personal analysis and broader financial insights.
*   Changes in prominent analysts' price targets can significantly influence market sentiment and stock movements, despite the inherent uncertainty in these projections.

![Price Target: An analyst's projection of a security's future price.](https://www.investopedia.com/thmb/64LN8BJ-U5SVsxIAGxSY0HA8ZrU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/pricetarget.asp-final-16ae544aab0a4c95980ef069cdf29c44.png)

*— Investopedia / Paige McLaughlin*

## Decoding Price Targets: How Analysts Determine Fair Value

A price target is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical [earnings](https://www.investopedia.com/terms/e/earnings.asp). When an analyst raises their price target for a stock, they generally expect the stock price to rise.

Conversely, lowering their price target may mean that the analyst expects the stock price to fall. Price targets are an organic factor in [financial analysis](https://www.investopedia.com/terms/f/financial-analysis.asp); they can change over time as new information becomes available.

## Essential Factors in Establishing a Price Target

The price target is based on assumptions about a security's future supply and demand, technical levels, and [fundamentals](https://www.investopedia.com/terms/f/fundamentals.asp). Different analysts and financial institutions use various valuation methods and take into account different economic conditions when deciding on a price target.

For [fundamental analysts](https://www.investopedia.com/terms/f/fundamentalanalysis.asp), a common way to discern the price target for a stock is to create a multiple of the [price-to-earnings (P/E) ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp)—by multiplying the market price by the company's trailing 12-month earnings.

In some cases, particularly with volatile stocks, analysts will look for additional guidance to form their price targets, which could include reviewing a company's balance sheet and other financial statements and comparing them to historical results, current economics, and the competitive environment, studying the [health of a company's management](https://www.investopedia.com/articles/02/062602.asp), and [analyzing other ratios](https://www.investopedia.com/terms/r/ratioanalysis.asp).

[Technical analysts](https://www.investopedia.com/terms/t/technicalanalysis.asp) use indicators, price action, statistics, trends, and price momentum to gauge the future price of a security. One way that they arrive at a price target is to find areas of defined [support and resistance](https://www.investopedia.com/trading/support-and-resistance-basics/). An analyst will do this by charting a price that moves between at least two similar highs and lows without breaking above or below those points at any point in between.

## Key Considerations for Assessing Price Targets

[Traders](https://www.investopedia.com/terms/t/trader.asp) will generally look to exit their [position](https://www.investopedia.com/terms/p/position.asp) on a stock when the originally expected value of the trade has been recognized. Although price targets can help traders understand when to buy or sell a stock, traders can and should determine their own price targets for entering and exiting positions.

Investors should see analysts' price targets as one part of their [due diligence](https://www.investopedia.com/terms/d/duediligence.asp).

> **Important**
>
> Despite the most careful analysis, we cannot know for certain the price at which a stock will trade in the future. Nevertheless, when a prominent analyst changes their price target, it can have a significant impact on the price of a security.

Some portfolio managers see price targets and research reports as marketing tools for brokerages to create interest in securities.

## How Are Price Targets Calculated?

Price targets try to predict what a given security will be worth at some point in the future. Analysts attempt to satisfy this basic question by projecting a security's future price using a blend of fundamental data points and educated assumptions about the security's future valuation.

## Are Price Targets Accurate?

Even with analysts' best efforts, price targets are educated guesses influenced by future performance estimates. Studies have found that, historically, the overall accuracy rate is around 30% for price targets with 12-18 month horizons. However, price targets do have the ability to sway investor sentiment, especially if they come from credible analysts.

## Where Are Price Targets Found?

Analysts generally publish their price targets in research reports on specific companies, along with their buy, sell, and hold recommendations for the company's stock. Stock price targets are often quoted in the financial news media.

> **Article Sources**
>
> 1.  Corporate Finance Institute. "[LTM (Last Twelve Months)](https://corporatefinanceinstitute.com/resources/knowledge/finance/last-twelve-months-ltm/)."