What is the stock rating?

Whenever we read finance-based newspapers and go through the business channels, we as traders generally come upon the word stock ratings. Whether to sell, buy or hold the stocks, we usually receive recommendations on stock and messages. These are known as stock ratings and are specified by the research analysts. This article will come across different stock ratings like buy, sell, hold, underperform, and outperform and explain what they are. These stock ratings can support and help stock traders make the correct trading decisions.

Stock Ratings

The measure/estimate of the performance of a particular stock in a specific set period is known as a stock rating. The brokerage firms and analysts use these types of ratings to give recommendations about stocks to retail traders and stock traders. For example, analysts refer and research the financial statements (income statement, balance sheet, annual reports, etc.) of different companies, chat with the management personnel and customers and listen to the upcoming conference calls of those companies. These ratings are generally issues at the intervals of three months, i.e., quarterly. In addition, the stock ratings have a target price that assists traders in understanding the intrinsic value of a stock when you compare it with its market value.

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What does the stock rating mean?

The recommendations given by research analysts on the stocks are based on listening to quarterly conference calls of companies, scrutinizing financial statements, and reviewing the prospects of the company’s management. In addition, the research analysts generally get in touch with the company’s management and their customers to get a clear picture of how the organization is performing compared to its past performance and its peers. They also conduct several types of research and surveys to gauge the prospects of the respective company. Finally, the analysts and investment banks issue detailed reports based on research and analysis on the stocks.

Types of stock ratings

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1. Buy Rating

A buy rating is advice for buying a particular stock that hints that the research analyst predicts the stock price to rise typically in short to mid-term time frame. The research analysts are generally of the notion that the stock can outshine the return of the similar type of stocks in the same sector, just like the launch of a new service or product.

2. Sell Rating

A sell rating is advice for selling a specific stock which implies that the research analyst predicts the price of a particular stock to go down below its present level, typically in the short or mid-term time frame. A solid sell rating indicates that analysts predict the particular stock price to go down significantly below its present level, either short or mid-term. If any research analyst advises a strong sell rating on any particular stock, then that particular company might end up losing its critical business from the company.

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3. Hold

When an analyst displays a particular stock as a hold rating, they predict the stock to perform in sync with the present market and at the same stride as similar sector stocks. Thus, this particular rating tells stock brokers/traders not to buy more stock nor sell it. Ahold rating is generally given when there is a slight ambiguity in a company regarding new services/products, future direction, or pending reports (quarterly). If a company is getting respectable profits but is still not particularly sure whether it will target its target, it could base the research analysts to give a hold rating.

4. Underperform

Underperform rating means that particular company stock is likely to do slightly worse than the benchmark index or market average. Therefore, analysts recommend staying away from that stock. Underperform rating is also known as moderate sell, underweight and weak hold. The analysts generally base it on a stock index like Nifty or within a specific sector or having similar characteristics like market capitalization (small, large, or mid-cap). If Nifty’s rating is 5% and the stock’s total return is 8%, then the index is underperformed by 3%. A stock is expected to underperform if the company has sluggish growth compared to the previous quarter forecast, thus making analysts believe that trend is most likely to continue ahead. Companies having a more significant debt load than same sector companies are rated in an underperforming category as debts can impede profit margins very hard.

5. Outperform

An outperform rating is given to a stock that is likely to provide us with greater returns than the benchmark index or market average. For example, if Nifty’s rating is 6% and the stock’s total return is 10%, the index is outperformed by 4%. It is also known as overweight, market outperforms, accumulate, moderate buy, or add. This rating indicates an uptrend and likely gaining momentum. Investors generally see this rating as a powerful indicator that the stock can be a good buy. It is also used instead of solid buy by some analysts and brokers. A stock can be given a rating if the company records faster than anticipated growth or is present in an industry or sector facing pressure due to market conditions.

Though these stock ratings might affect the individual stocks that may trigger a sharp move either up or down in the stock price, investors might develop their notion and opinions on both price target and the stock rating.

Key Takeaways

• Stock Ratings can be divided into five different types of ratings: buy, hold, sell, outperform, and underperform.
• A stock rating is the measure/estimate of the performance of a particular stock in a specific set period.
• Research analysts refer and research the financial statements (income statement, balance sheet, annual reports, etc.) of different companies, chat with the management personnel and customers and listen to the upcoming conference calls of those companies to issue a suitable and precise stock rating.