What is a rating in stocks? The triple A (AAA) rating.

The stock rating indicates the creditworthiness of a company. In this article, we will look at how stock ratings work.

The stock rating

Large rating agencies issue stock ratings. These are mainly based in America. Therefore, it is mainly the large and international companies that receive ratings.
The rating of a company indicates to what extent this company is creditworthy:

• With a high rating, the company is financially healthy & creditworthy.
• With a low rating, the company is financially unhealthy & not creditworthy.

Besides companies, rating agencies can also provide ratings for entire countries.

Who provides credit ratings?

Credit ratings are provided by so-called ‘rating agencies’, some well-known ones are:

• Standard & Poor’s
• Moody’s
• Fitch

Rating and risk profile

You can use the rating of a stock or bond to determine if this investment product is suitable for you. You do this by comparing the rating with your risk profile. Stocks or bonds with a low risk rating have a higher probability of facing bankruptcy, but the potential return is probably also higher.

If you want to take as little risk as possible, only invest in a stock or bond with a high rating.

The highest rating: the Triple A (AAA) rating

The highest rating a stock or bond can receive is the Triple A (AAA) rating. If a stock or bond receives this rating, you almost don’t have to worry about the creditworthiness. Companies or countries with a Triple A rating are financially strong: the likelihood of financial problems is small.
Investment products with a high rating generally offer limited positive returns. The risk of the investments is lower, but this often comes with a lower return as well.

Lower ratings

Not all companies and countries that are rated by rating agencies have a Triple A rating. A company or country with a B rating is typically still creditworthy, but a C rating or lower is already less reliable. Investing in companies or countries with a rating of C or lower is only recommended when you are willing to take risks.

A downgrade of the rating

The rating of a company or country is not fixed. This is logical because the creditworthiness of a company or country can always change. Thus, a rating can be upgraded, but it can also be downgraded.
If a lower rating is issued, this may affect the price of your investment:

• Improvement: when the creditworthiness improves, you typically see an increase in price.
• Deterioration: when the creditworthiness weakens, you typically see a decrease in price.

Rating scandals

Finally, it is important to critically examine the reputation of the agency that issues the rating. During the economic crisis of 2008, there were often incorrect ratings. These ratings were issued because the companies that issue the ratings were also paid by the companies that received the ratings. When the company did not receive a good rating, they left the rating agency for another rating agency.

As a result, many companies had an unjustifiably high rating. Ultimately, these scandals with the rating agencies contributed to the emergence of the economic crisis of 2008. Therefore, it is critical to always critically examine the rating of the company. Study the economic situation of the company before you decide to actually buy the stocks.