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Independent Investment Ratings
When you make an investment, there are plenty of people around to give you advice: your broker, your relatives, your friends. But many investors seek out the opinions of uninterested parties. For information, they turn to the many independent firms that rate stocks, bonds and mutual funds. These ratings often can be found in popular finance magazines and by contacting the ratings firms directly. Individual firms may use different methods to determine the rating of a specific security. All the firms have one thing in common, however: Their ratings should be viewed as informational resources rather than predictors of future performance.
Fixed Investment (Bond) Ratings
Stock Ratings
Mutual Fund Ratings
Fixed Investment (Bond) Ratings
Companies that rate fixed investments try to determine whether the bond issuer will be able to repay the interest and principal they owe when the bond comes due. Standard & Poor's (S&P) and Moody's Investors Service, Inc., are two of the best-known in the industry. Both companies use letter grades when evaluating bonds.
S&P:
- AAA, AA, A and BBB = "investment grade" securities, minimal risk of default in timely payment of interest and principal
- BB and B = more speculative than "investment grade" securities, greater risk of default
- CCC, CC and C = junk bonds, highly speculative
- D = bonds already in default
- N = not rated
Moody's:
- Aaa, Aa, A, Baa = "investment grade" securities, minimal risk of default in timely payment of interest and principal
- Ba, B, Caa and Ca= more speculative than "investment grade" securities, greater risk of default
- C = no longer paying interest or already in default
- N = not rated
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Stock Ratings
Many firms analyze individual stocks. ValueLine, for example, rates stocks based on timeliness and safety, on a scale of 1 to 5 with "1" being the highest rating.
- Timeliness: measured by a stock's probable price performance during the coming six to 12 months compared with other stocks.
- Safety: an assessment of the stock's price stability and the issuer's financial strength.
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Mutual Fund Ratings
Three companies provide the most commonly used ratings for mutual funds:
Lipper, Inc.
- Bases ratings strictly on fund performance.
- No adjustment for risk.
- Ranks funds from highest to lowest performance for the period being reported within a certain investment category.
Morningstar® rates funds on a scale of 1 to 5 stars with 5 stars being the best.
- Evaluates funds' relative returns and risks (as defined in relation to the 90-day Treasury bill).
- Uses a quantitative system to determine a risk-adjusted rating.
- Goal is to identify funds that perform best given the level of assumed risk.
- Of the funds rated in each category, 10% receive five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive two stars, and 10% receive one star.
ValueLine rates funds on a scale of 1 to 5 based on two factors:
- Overall measurement of various aspects of performance, including risk
(1 = highest rank).
- Separate risk factor that rates the total level of risk the fund has assumed
(1 = safest).
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