Why Brokers Usually Rate A Stock and What’s in it for them?

We see brokers rating a stock and reiterating them all the time. To an inexperienced investor/trader that may sound like a great recommendation for free sent by a reputable company. But Why Brokers Usually Rate A Stock and What’s in it for them?

Let’s take an example of a London stock exchange stock.

We have seen multiple reiteration of BUY ratings of a London Stock Exchange company by their broker (Source: http://www.directorstalkinterviews.com/?s=qfi+rating ) They have been rating 45p since November 2015.
But as they say “The Devil is in Details” or rather “The Devil is in the Disclaimer” of their recommendations and research reports.

I found a copy of their Research Report where their reiterate BUY rating and published their research. Wooaah! what do I see in the Disclaimer of their Rating/Research report on the last page!

1. THEY SAY THAT THEIR RATING/RECOMMENDATION DOCUMENT IS JUST FOR MARKETING.
2. THEY MAY BE GETTING PAID/COMPENSATED TO DO THIS BY THE ISSUER OF PUBLICATION.
3. THEY CAN HAVE 1% OR MORE OF ANY CLASS OF ENTIRE AVAILABLE STOCK PILE.
4. THEY CAN ACT AS MARKET MAKERS TOO IN THE STOCK THAT THEY RATE.

This clearly shows a Conflict of Interests. They are not doing anything legally wrong as they have disclosed this information.

As per law introduced few years ago all brokers and paid promoters must include this in their report. Here is why they have to include this information:

https://www.sec.gov/oiea/investor-alerts-bulletins/ia_newsletters.html

http://en.wikipedia.org/wiki/Markets_in_Financial_Instruments_Directive (Directive 2004/39/EC)

An investor/trader must keep this in mind before following them blindly.

Good Luck
-TradeYodha

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