In Investing, what is a Target Price?

Target prices are the anticipated prices that investors project a given stock or security will trade at within a specified time period. The target price can relate to both buying and selling stock other types of securities. Analysts may assess the target price of a given investment in the short term or the long term.

Calculating the target price is slightly different, depending on what the investor wishes to do in relation to the stock. For example when the investor is looking at short or long hedges as they relate to the stock, this would involve adding the current futures price to the expected basis. When attempting to project a target price as it relates to puts, the investor would subtract the premium from the futures price and add back the expected basis. When a call is the intended strategy, this would involve adding the futures price, the premium, and the expected basis to arrive at the target price.

Generally, the time frame for calculating the target price is anywhere from six months to one year. However, it is possible to use the basic formulas to make projections as far in advance as two years. Most analysts recommend not projecting a target price more than eighteen months, especially if there are some indications that the market will not remain flat for more than one calendar year.

Potential market volatility, as well as the historical volatility of the stock in question, will play a huge role in how helpful projecting the target price actually is to the investor. Many calculations will make an assumption of a relatively stable market for the period under consideration. The investment proper will also be anticipated to perform in a manner that is in keeping with past performance. Of course, this is not always the case with either a market or an individual investment, and the analyst may prepare more than one target price matrix for the period cited. This can allow the investor to get an idea of the projected target price when different combinations of market activity are assumed.