What is a Stock Rating?

A stock rating refers to a grade given to a stock. Ratings are provided by financial analysts. Each rating service has different classifications and grades used for stock ratings.

A stock is a share of a company, or an ownership stake in a public company. Each stock has a price based on the number of shares issued, the value of the company, and the market's perception of the worth of the stock. Stocks fluctuate on a daily basis when the stock market is open, based on what a person is willing to pay, called the bid, and what a person is willing to sell for, called the ask.

Investors buy stocks with the hope that the stock price will go up. As a result, many investors do research on stocks before they buy them. Part of this research may involve looking at the stock rating.

Stock ratings are issued by rating agencies and/or other financial analysts. Standard & Poor, for example, is one such rating agency that analyzes a stock and assigns it a rating. Each different group of analysts may have a slightly different rating system. Some ratings are published online, at sources such as Yahoo Finance or The Street.

One common rating system involves an analyst labeling the stock as either a buy, sell or hold. A buy rating means the analyst believes the stock is a good buy; a hold rating means that those who own the stock should hold on to it, and a sell rating means that those who own the stock should sell it. Some rating scales also include strong buy and strong sell as a rating category.

Stocks may also be rated on whether they will under perform or over perform. Under perform means the stock will not do as well as the market expects. Over perform means that the stock is likely to do better than the analysts or markets expect.

Stock analysts look at a number of factors when determining a stock rating. A stock rating is often based on the price-to-earnings ratio, which is a comparison of the cost to buy the stock versus the expected company earnings. Other matrix are used to determine a stock rating as well, such as looking at the company's assets and debts on its balance sheet.

When an analyst changes his rating for the better, it is considered an upgrade. Analysts can also downgrade the stock, which occurs if they move their recommendation from a sell to a hold or a hold to a buy. A change in the rating of a stock can cause the stock price to go up or down.