But, if you love reading financial newspapers, you must have come across the phrase “stock rating.” Do you know the meaning of the stock ratings system?
We often get recommendations on selling, buying, or holding certain stocks. These are referred to as stock ratings. So if you want to know how to use the best stock rating system, please read on…
What Are Stocks Ratings?
Stock ratings refer to the measure of a stock’s performance at any given period. The analysts use the best stock-rating system to give recommendations to traders and investors into which stocks to invest in.
These recommendations serve as a great guide on which stocks to deal with during a specific period. An analyst report also shows you which stocks to avoid for 3 or 4 months.
To provide adequate stock ratings, brokerage firms and analysts analyze a vast amount of data. Analysts examine the financial statement of several firms and attend some conference calls. They even talk to these companies’ management and find their projections before making a decision.
Fortunately, stock analysts offer these ratings once every three to four months. Therefore, you should always have the current stock rating report.
When you go through the stock ratings, you’ll notice they include the target prices of the recommended stocks. The target price will give you an idea of the projected potential of the stocks. So by evaluating the stock rating system, you’ll know when to hold, sell, or buy a stock.
What Does The Stock Rating Mean?
Generally, research analysts give quarterly stock recommendations after evaluating the company’s performance. They examine the financial statements from the previous years to determine the company’s trend. On top of that, they also examine what happens to their financial statement when they launch a new product.
Other than the statements, they also have direct contacts for the company’s management. Therefore, they contact them and ask all the right questions about their performance. And some of the questions pertain to the company’s financial call on their future projections and past performance.
They even have direct contact with the company’s clients, who have a pretty good idea of how the company operates. After talking to the management and customers, they conduct several surveys on these companies.
The survey analyzes how the market responds to the company’s services and what its customers think of their competitors. On top of the surveys, they also conduct detailed research on the company’s future prospects.
These surveys help them determine which stocks deserve a high rating and which ones their clients should avoid. Fortunately, the research and surveys help them determine which ones to buy, sell, and hold.
Once finished, the analysts can finally provide a detailed report on the recommended firms to the traders and investors. Remember, the report is a product of objective and reasoned stock analysis by experienced analysts. The stock rating system serves as a crucial tool for traders.
Types Of Stocks Ratings
Before you try and break down the analysts’ stocks rating report, you need to understand my next statement…
There are several types of ratings.
They’re divided into buy, sell, hold, outperform, and underperforming ratings. For more details, please read on…
Buy Stock Rating
Generally, a buy rating refers to a recommendation to buy certain stocks. It implies that your stock analyst expects the stock’s price to rise in the short-to-mid-term. Strong buy ratings mean that they believe these stocks’ prices will rise drastically shortly.
The introduction of new products or services can trigger this.
Sell Stock Rating
Basically, the sell rating is the opposite of the buy rating. It refers to a recommendation from the analyst to sell certain stocks. This shows that your analyst believes that the price will drop in the short-to-mid-term. It shows that the analysts have discovered some challenges that will affect the price of their stocks.
Poor sales of specific products or disruption of certain services can force the price of a particular stock to drop.
Hold Stock Rating
A hold rating shows that the analyst expects the stock to behave in line with the current market. Basically, the price will move at the same rate as similar stocks. Hold rating shows a trader that they should not buy or sell the stock.
The analyst believes that there is uncertainty over the firm’s new products/services.
Underperform Stock Rating
It means that the firm might do a bit worse than the benchmark index or market average. Basically, the analyst is advising you to stay away from a specific stock. In fact, investing in such stocks may result in a substantial loss thanks to the uncertainty predicted by the analyst.
Therefore, if a stock’s nifty return is 6% and its stock return is 3%, then it underperformed by 3%.
Outperform Stock Rating
Generally, analysts assign an outperform rating to stocks that are projected to offer profits higher than the benchmark index or market average. This is an excellent stock that any trader can benefit from within a certain period.
For instance, if a Dow-Jones Industrial total average return is 4% and its real return is 8%, it has outperformed by 4%.
Overweight Stock Rating
Unlike underweight, overweight stock ratings mean certain stocks deserve an even higher weight than their current benchmark weighting. This means that traders have to monitor this stock for future trade opportunities. After all, stock analysts believe that the firm’s stock price may improve shortly.
Underweight Stocks Rating
An underweight rating is a “don’t purchase or sell” recommendation that an analyst gives to a particular stock. For an analyst to give this type of rating, they believe the stock will perform poorly for the following year.
It can also mean that the stock will grow or lose value slowly. That depends on the condition of the market. But generally, it shows that the stock may underperform in the market.