Reviewed by Aug 27, 2020| Updated on
What is a Downgrade?
A downgrade is a negative adjustment to a security ranking. This situation arises when analysts believe that the potential security prospects have deteriorated from the original recommendation, typically due to a significant and fundamental shift in the activities of the business, future outlook or industry.
Multiple organisations, with a buy, hold or sell rating, provide sell-side research and rate securities. A stock reduction will shift the grade from a bargain to hold or purchase to a sell. Debt also has its ranking scheme. The rating agencies are awarding debt letter grades, equivalent to letter grades received in school. If a bond is downgraded, it could switch from an "A" to a "BBB" ranking.
Analysts placed recommendations on securities to give their customers or investors a general understanding of the security's anticipated results looking forward toward. These recommendations are changed on the basis for the recommended changes, such as the price of the stock or the newly reported details in the company's financial statements.
There are rating agencies whose sole responsibility is to study debt issuers and assign ratings to the various types of debt of issuers. S&P and Moody's are two of the critical rating agencies. Sometimes bond portfolios are restricted in terms of the kind of liability they may hold based on the debt rating. Debt ranked as "BBB" and above is considered to be a degree of investment.
Reasons for Downgrade
An analyst may downgrade a stock from a buy to a sell after the issuing company releases details about an investigation into the company's operations by the Securities and Exchange Commission. Also, stock can be downgraded because of the issuing company's weakening finances, or because the existing marketplace or macro climate does not benefit the line of business of that company.