Many people are aware of the stock market and its functioning. The people who seek stocks as an investment material always prefer to do a bit of stock market research and homework before investing their money in any trade.
When you see any business channel, a single word you often come across is Stock rating. People have many questions regarding the term stock trading such as when to buy, sell or hold a stock.
In this blog, we will highlight the fundamental yet important term share market trading and how the right knowledge of stock rating helps investors and traders to achieve their best trading decisions.
Introduction of Stock Ratings
Stock ratings are used to measure the performance of a stock in a given specific time period. Analysts and numerous brokerage firms keep you aware of many stocks when they issue stock recommendations to investors and traders.
In order to provide effective stock ratings, analysts and brokerage firms go through the financial statements of various companies, talk to the management, and attend conference calls.
The stock ratings are issued once three months or quarterly.
By reading stock ratings, you may notice that the ratings include a target price that helps traders to reach its intrinsic value which in turn gives people an idea about the potentiality of a stock.
Hence by evaluating a stock’s rating, one can get a clear idea of whether you buy, sell or hold a stock.
What Does a Stock Rating Mean?
Research Analysts give recommendations regarding stocks by evaluating their financial performance, reviewing the company’s management, and listening to the company's financial calls on their future prospects.
Sometimes, these analysts have direct access to contact the management team and the customers to get an idea about how the company is performing compared to its past performance.
To get a deep insight into a stock, research analysts also conduct surveys that help them decide which stock deserves the best rating and which does not?
Types of Stock Ratings
Above we discussed stock ratings and how to use them for investment decisions. Here, we will discuss the five types of stock ratings:
1. Buy Ratings
Buy ratings gives recommendations to traders and investors to buy a specific stock which analysts expect that the price of a stock will increase in the short to mid-term.
2. Sell Rating
A sell rating recommends selling a particular stock which means that the analysts expect that the price of a stock will subsequently fall from its current price.
3. Hold Ratings
This rating suggests that the particular stock will stick to the same price for the near term.
The hold ratings tell the traders to not buy or sell the stock but to hold it for a short term.
Hold rating is assigned to a stock where there are some uncertainties or some company’s prediction. For example company’s new service or product launch.
4. Underperform Stock Rating
An underperform rating indicates that the stocks are going to perform down as compared to the market performance or set benchmark.
In such a situation, the analysts suggest you stay away from such stocks or avoid investing in stocks.
For instance, if a stock’s total return is 3% and Nifty’s return is 6%, then it underperformed the index by 3%.
5. Outperform Stock Rating
An outperform stock rating tells you that the particular stock is going to perform well in the stock market and will give outstanding stock market trading returns in the future.
For example, if a stock’s total return is 12% and Dow Jones Industrial Total average return is 6%, then the stock has outperformed the index by 6%.
Analyze Stock Rating For Investment in the Stock Market
Stock ratings provide a lot of impact on the individual stock as it helps traders and investors to get the intrinsic value of a stock that will tell its past and future performance. Also, it gives investors an idea of whether to buy, sell or hold a particular stock.
Although stock ratings tell many things about a stock, investors can also use their own experience to predict the potential value of a stock.
Overall, stock ratings help you to make an appropriate equity trading plan to earn maximum profit.
Hence, if you strategize your move regarding a stock, you may not neglect the stock rating and stay updated with every stock rating.
Key Takeaways
A stock rating is a measure of a stock's performance in a specific period.
Stock’s rating can be categorized into five types: buy, sell, hold, underperform and outperform.
Analysts define the stock rating by researching various companies, talking to management, listening to customer’s reviews, and attending conference calls.
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