A Survey of the Methods Used by UK Investment Analysts to Appraise Investments in Ordinary Shares

A Survey of the Methods Used by UK Investment Analysts to Appraise Investments in Ordinary Shares

Purpose and Motivation

The study sheds light on the United Kingdom (UK)’s investment analysts practised appraisal methods. The prime reason to conduct the research was the vast gaps in the literature in analyzing the appraisal methods. The paper revolves around the interviews and findings of the surveys which covered 1978 and 1981’s data. The surveys aimed to give sufficient information about those methods which used to appraise investments ordinary shares of companies by UK’s investment analysts. The motivation of this study comes from the credibility of those analysts as they served as both outsiders and insiders of the organization. They can be individual consultants or the organizations’ employees and hold an essential part due to their investors’ role. Formally, the analysts desire to upsurge the portfolio return subject while the next lot of analysts willing to sell or purchase their shares to the clients, to gain a sufficient amount of commission. The main nuances of this paper were to analyze the behaviour of investor and advisor analysts to see the impact of their actions on the share market. The analysts played a crucial role in the share sale and purchase cycle of ordinary shares as they make concrete recommendations on the procedure. However, the literature showed a deficiency of researches on the behaviour of investment analysts, despite their importance in the process of decision making, which cater to all the aspects, including accounting policymaking.

The Methodology of the Research   

In this paper, firstly, the authors gave some references from the literature about the selection of the method to unearth the perceptions of investors’ analysis. Then described two modes of the survey, unstructured interviews and questionnaire method, which they found suitable for this study.

Unstructured interviews

For the explicit description of the questions of those interviews, piloting was done to observe the strengths and weaknesses of the interview guide. The sample size of data is small, but dig out an ample amount of rich information as the nature of questions were open-ended which gave a considerable room to the participants to speak about their experiences about the analysis of appraising investments in ordinary shares. The sample of six investment analysts was taken from medium and large size firms. The title of the questionnaire was “designed to identify the decision processes use by stockbrokers and investment analysts when recommending whether or not to buy, hold or sell shares in quoted companies”. Interviews started from some probing questions regarding the procedure, and the researchers tried to be transparent medium.

The questionnaire

In  the second phase of the research, the first draft of the questionnaire utterly based on the previous responses of the participants on investment analysis and some related literature. Through several discussions with colleagues, second and then third and fourth draft were prepared, which consists of hundred questions and investor analyst comments. The respondents were selected from “UK section of the Member Societies Yearbook of the European Federation of Financial Analysts”, comprises of those UK members who have represented Society of Investment Analysts. The total number of participants was four hundred and sixty-five, which was chosen by selecting every fourth analyst. For the triangulation of the selection, the Yearbook’s pages were checked to find the exact ratio of stockbroking analysts. The researchers excluded a list of forty non-members as they categorized UK’s top analysts, which increased the population size. The total number of Five hundred and five were sent to the participants and marked non-members questioners, with no restriction to reveal their identity.  They received the total number of three hundred and four responses, and one hundred and two responses were declared outliers.

Findings and Discussion

The primary appraisal technique was shared by the participants was the fundamental analysis as not even a single responded mentioned about the usage of technical analysis in their interview. However, they underscored the importance of comparing dividend, price earning and market price, which showed that they used some aspects of technical analysis. Not a single respondent shared any other model such as analysis, and the usage of this model is not a common practice. Thus it is proved this theory secured a remarkable position in the literature, but it is not used in practical grounds. The highest prediction was not crossed the year. This prediction is based on the formula of “applying an appropriate price earning on the estimated earning” to forecast the upcoming market price. Then, the next step was to compare the current and forecasted price to see the value of the share. The main difference was observed that the process of estimating earning in all six firms as their techniques were diffident from each other, most of them used broad approach, but not a single one had responded clearly about the predication of PE ratio. This analysis gives a rich data to the analysis, which they can show to the parties and also help to bring more credibility to the analysts’ predictions due to the heavy data-filled reports. Technical terms and processes add more content in the reports to get an instant strong report’s impression On the other hand beta analysis needs some trading data and the different uses of these techniques are related to their nature. For instance, fundamental analysis is used to find the value of the share, beta analysis is used to evaluate the portfolio management performance, and technical analysis is seen when the shares were purchased. PE ratio is firmly based on the judgment and experience of the analyst to forecast the market value of stocks. The rise and fall of dividends price also impacted on the valuation of future market value and study recommended that discounted dividends could change the value of the share. However, the literature did not find any particular way to estimate the rate of these discounts.  A number of participants’ criticized the current policies; however, some are happy to be a part of it as there is a large gap of practical knowledge is seen in analysts forecasting techniques, which creates conflicts with their clients. Thus, the study recommended using all the analysis techniques as per their requirements, instead of making quick and visually appealing decisions. Another recommendation was to cater to the impact of social raise and fall of shares as it is not explicitly mentioned in accounting literature, but crucial handle socio-economic issues.