What is a Price Target?

Malcolm Tatum
Malcolm Tatum

With investing, a price target is the rate that a trader would want to receive in order to realize the best possible outcome for the investment being traded. This usually relates to the sale of an investment, since the desired rate is the price that the seller wants to get for the securities currently offered for sale. Traders utilize a wide range of strategies to determine what the price target for a given asset should be, with the methods ranging from simple intuition to highly complicated formulas designed to predict where the market price will be at the time the investor wishes to initiate the sale.

A price target is a financial goal set by a stock trader.
A price target is a financial goal set by a stock trader.

For some investors, arriving at a price target involves assessing the past performance of the investment, and relating that data to the anticipated movement of the asset’s price within a specified period of time. This can give the investor some idea of how much profit could be made from holding on to the asset for a month, six months, or a year. If the investor determines that the security price will be at a desirable level in a year, he or she may set the target price at the rate that the security is expected to reach at the end of twelve months.

If the security performs better than anticipated and reaches the price target prior to that time, the investor can either choose to offer the asset for sale when the target is realized, or continue to hold the asset for the entire period covered in the projection. There is some risk here, because there is always the chance that the investment will peak early, then begin to decline, eventually falling back below the price target. For this reason, investors using this approach should constantly monitor market conditions and move quickly if the value of the asset shows signs of beginning a downward spiral.

Factors such as the calculation of a moving average or Fibonacci extensions are also involved in the process of setting a price target. Fibonacci extensions are price levels that make it possible to project support and resistance within the marketplace during the time frame under consideration. From this perspective, the extensions can aid in identifying a likely time to sell the asset and gain the most benefit from the sale.

Another approach to setting a price target is relying on the recommendations of investment professionals. For example, if a Wall Street analyst were to set a six-month price target of $100 in US dollars (USD) for a stock that is currently trading at $60 USD, some investors would adopt that target as their own, without spending much time analyzing the data for themselves. While this approach does have the advantage of utilizing the expertise of reliable professionals, there is always the possibility that the analyst overlooked some crucial factor that the investor would have considered before setting the target.

Since the establishment of a price target is so subjective, there is no one ideal strategy that all investors will use to set the price. Even when considering the same set of factors, it is possible for two different investors to set different price targets for the same investment, based on their interpretation of the data and the level of return they hope to generate from the trade. As with most types of projections, setting a target does create a goal to work toward, but does not guarantee that the desired outcome will actually occur.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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