What is a Covered Stock?

Covered stock is a stock option that is monitored by a chartered financial analyst connected with a brokerage firm or by an independent analyst. The idea behind monitoring or covering the stock is to collect data regarding the movements of the stock within different markets and report that information back to clients. This activity makes it possible for investors to use the collected data for the purpose of determining whether to buy, hold, or sell shares of that particular stock option.

Depending on the prominence of the covered stock within the marketplace, a brokerage may devote one or two analysts to monitoring and evaluating the movements of that security, or assign the task to as many as thirty or forty analysts. Typically, stock options that are considered blue chip or mega cap will receive a great deal of attention from analysts, since their movements often impact what happens with less stock options traded on a given exchange. Along with the number and price of shares issued as part of the stock option, the level of public recognition of the option may also play a role in determining how many analysts are tracking the stock’s movements.

While terminology varies somewhat from one market to another, an analyst usually issues what is known as a coverage initiated report when he or she begins the task of monitoring a covered stock. Also sometimes referred to as an initiating coverage report, this document simply alerts clients of the brokerage that the coverage has commenced and will continue until further notice. From that point, the analyst releases updates from time to time on the performance of the stock. The frequency of those updates is impacted by what is happening in the marketplace in general, as well as any events of significance that relate to the company that issues the shares of stock. The periodic reports will note what type of effect those events have had on the price of the shares. In some cases, the report detail will also provide some estimation of how long the current trend will continue.

When an analyst ceases to monitor the activity of a covered stock option, he or she usually issues what is known as a discontinuing coverage report. This simply alerts investors and brokers that the report will no longer be issued. An analyst may stop monitoring a covered stock for several reasons. The change may occur because the analyst is leaving the firm, or is being reassigned to monitor some other covered stock option. When a company shuts down and the shares are no longer being traded, the analyst will also issue this type of report, alerting everyone concerned to the fact that the company has ceased to exist.