A price target is the projected price level of a financial security stated by an investment analyst or advisor and includes assumptions of future activity. It represents a security's price that, if achieved, results in a trader recognizing the best possible outcome for his investment. This is the price at which the trader or investor wants to exit his existing position so he can realize the most reward.
Essentially, a price target is an individual analyst's expectation of the future price of a security, usually a stock. There may be many price targets for a single security. An influential analyst on Wall Street may give a stock that is currently trading at $60 a one-year price target of $90; however, there is no concrete way to calculate a price target. Different analysts and financial institutions use various valuation methods and take into account different economic forces when deciding on a price target.
For example, two separate traders holding a stock trading at $60 may have drastically different opinions about where the stock will go. One trader may set his price target at $75, while the other sets it at $120. Price targets are a function of risk tolerance and the amount of time an investor plans on holding the security. Using technical analysis, traders rely on tools such as previous support and resistance, Fibonacci extensions and moving averages to aid them in determining an appropriate price target.
Price targets often affect the price of a stock itself. For example, if a stock is trading at $60, and the company has a bad quarter and analysts reduce the price target from $70 to $50, it is going to generate selling activity and reduce the share price closer to the $50 target. Conversely, if the same company with a $60 share price has a good quarter and analysts increase its price target from $70 to $80, more investors will choose in invest, driving up the share price.
Using a real example, on July 7, 2016, Walgreens Boots Alliance reported its Q3 results and beat analysts' expectations. This means the company's financial performance was better than what was forecasted. As a result of the positive performance, Barclays increased its price target on Walgreens to $79, up from $76. This, along with the good performance itself, caused the share price to increase 0.12% by the end of the trading day on July 7.