A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond. The rating assigned indicates the stock or bond's level of investment opportunity. The three major rating agencies are Standard & Poor's, Moody's Investors Service, and Fitch Ratings.
Analysts who work on both the buy-side and sell-side of the industry research stocks and write opinions on those stocks, which will often include a rating such as "buy", "hold " or "sell". Meanwhile, bonds are rated by the three major bond rating agencies.
When it comes to major Wall Street banks and institutions, they all use different terminology and classifications. Morgan Stanley, for example, uses the terms "overweight", "equal-weight", and "underweight". The timeline for its ratings is 12 to 18 months.
Credit Suisse uses the terms "outperform," "neutral", and "underperform", which is based on a 12-month time period. All of these terms are variations of the "buy", "hold", and "sell" ratings.
The Scale of Ratings
The various nuances, detailed in the following chart, include multiple terms for each of the ratings ("sell" is also known as "strong sell," "buy" can be labeled as "strong buy").
Mapping the Basics
For now, let us dissect the traditional ratings of "sell," "underperform," "hold," "outperform," and "buy," and assume that each firm, no matter how wacky the system, can map back to these.
Buy: Also known as strong buy and "on the recommended list." Needless to say, buy is a recommendation to purchase a specific security.
Sell: Also known as strong sell, it's a recommendation to sell a security or to liquidate an asset.
Hold: In general terms, a company with a hold recommendation is expected to perform at the same pace as comparable companies or in line with the market.
Underperform: A recommendation that means a stock is expected to do slightly worse than the overall stock market return. Underperform can also be expressed as "moderate sell," "weak hold," and "underweight."
Outperform: Also known as "moderate buy," "accumulate," and "overweight." Outperform is an analyst recommendation meaning a stock is expected to do slightly better than the market return.
Sources:
- Investopedia, Rating: Definition in Finance, How It Works, Types, Agencies, accessed 26 December 2023, <https://www.investopedia.com/terms/r/rating.asp>
- Investopedia, Understanding Buy, Sell, and Hold Ratings of Stock Analysts, accessed 1 January 2024, <https://www.investopedia.com/financial-edge/0512/understanding-analyst-ratings.aspx>
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