What Does Coverage Initiated on Stocks Mean?

Coverage initiated means that a stock analyst has begun to cover, or follow, a particular stock and has issued an initial report and/or rating on it. Brokerage firms have research departments that analyze stocks and issue buy and sell recommendations to retail and institutional clients. A research department employs a number of analysts, each assigned several stocks in a particular sector or industry.

Stock Selection

An analyst can only follow, or cover, so many stocks. But the composition of a particular stock group or sector constantly changes. Some companies go out of business or are acquired by others, new companies enter the field. Periodically it becomes necessary or advantageous to add a new stock to the research list. When that happens, the firm initiates coverage on it.

Effect on Stock Price

The effect of coverage initiation on stock price varies. It depends on the analyst, the stock and the relationship between the brokerage firm and the company and the stock rating/recommendation. If the analyst has a good track record and his coverage is favorable, the stock price may advance. If the broker underwrote the stock in an initial public offering and its analyst comes out with a tepid or negative recommendation, the stock price may drop.

Institutional Buying

Many institutional investors only buy stocks covered and recommended by analysts, so when coverage is initiated they may start buying the stock for the first time, pushing the price higher.

Free Advertising

Brokers charge for good research. Coverage initiations are usually widely announced to help generate new business but if you want to continue to benefit from an analyst’s opinion, you will need to become a client or subscribe in order to be able to get the updates and changes that continuing coverage will provide.

Second Opinion

Some investors who are not certain about their own stock picks see it as a confirmation of their opinion when a prominent analyst initiates favorable coverage on a stock they own or are considering, and view coverage initiation as validation of a stock’s investment merits.