Target price definition

The target price of an asset is the predicted or predetermined price at which an investor will want to buy or sell it

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What is a target price? Read on to find out – Photo: Shutterstock
                                

Target price explained

A target price is the anticipated price of a stock in the future. When the stock in question reaches this price, shareholders will be willing to sell it, or investors will want to buy it.

This price has been found through evaluation techniques such as technical analysis or fundamental analysis. The analysis considers the demand and supply of the asset, its trading volume, liquidity and other price-related information. The estimation is for a specific length of time, usually 12 months.

Target price meaning

The target price is projected using analytical tools and personal experience. It is used in investment decisions. An investor could decide to buy stock if the expected target price is higher in the future. Alternatively, if an investor anticipates a target price lower than the current price of stocks they own, they may decide to sell.

At this price, traders will define their exit and entry strategies. It is the price at which they plan to close their positions. The anticipated price is not locked in, and it can be adjusted depending on new information or movements in the market.

What is the target price?

Because the target price is established using different techniques, different investors and traders may reach a different target price for the same asset – and their expectations will direct their decision regarding an investment. This explains why there are investors willing to sell an asset at a specific price, and buyers willing to purchase the asset at a predetermined price.

Consequently, it is said that financial markets are a zero-sum game. This means that for one side to make money, another side should record a loss. If every investor predicts the same target price and the same direction of price movement, then there won’t be an investor to enter the opposite transaction.

For instance, if a stock has a current price of €10, and all market participants set a target price of €15, then nobody will be willing to sell the stock since they expect an increase in the future. However, this is a theoretical example, because in reality investors use different techniques and different indicators to define the target price. As a result, some investors will expect a price increase and buy the stock accordingly, while others will anticipate a decrease and sell.

You may also come across the term ’target price’ during a takeover, or when dealing with derivatives such as options. In terms of takeovers, the target price refers to the price offered by the buyer to the target company shareholders. From an options perspective, it is the price at which the option will be executed, or the price when the option is in-the-money.

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