Reviewed by Aug 27, 2020| Updated on
A rating is an evaluation of a bond or stock done by a rating agency or analyst after carefully studying it. The rating assigned to security can indicate the investment opportunity level of a stock or bond. There are various rating agencies in India, and the most popular ones are CRISIL and ICRA.
Analysts working on both sell and purchase sides of the industry are involved in researching stocks and give their inputs on the stocks in question. This usually includes a rating, and their opinion about holding, buying, or selling a specific stock. A company will improve its rating if it maintains a lower debt and stays stable despite numerous changes in the company's management.
An analyst on the purchase side writes opinions to help his or her team. Based on the input the team receives, they will be able to make informed decisions related to portfolio management. Sell-side analysts give their inputs based on which investors may invest in a particular security or stock.
Sell-side analysts specifically do this in an attempt to promote or sell a given stock. For stocks, analysts typically give their rating as 'purchase', 'sell', and 'hold'. Also, they will generally give out a detailed explanation as to what made them arrive at a particular rating that they have given out.
A rating agency gives ratings to debt instruments, such as bonds. For bonds, rating agencies will evaluate the very basic financial abilities and examine the issuing entity’s capabilities of paying back the principal while regularly paying out interest (coupon payments), which it had agreed for.
The ratings are given by various authorised rating agencies and are fundamentally based on the creditworthiness of the issuer. Therefore, this rating can be considered as a direct measure of the possibility of a default. Nevertheless, the priority of payments and credit stability are also considered while assigning ratings to the instruments.