Basic information on financial databases: cook books, tips and tricks & economic news

This blog contains schematic easy to grasp - hands on - help in performing searches in economic databases, making work sets and making them inter-exchangeable between the databases.

* Disclaimer. I am not a finance professional. Most posts are the result of personal findings.

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Stock rating, debt rating and stock ranking

Definition Stock ratingAn evaluation of a stock's expected performance and/or its risk level as judged by a rating agency such as Standard and Poor's. A stock rating will usually tell the investor how well a stock's market value relates to what analysts believe is a fair value for the stock, based on an objective evaluation of the company. The greater the amount by which the fair value exceeds the market value, the more highly recommended a buy the stock is. Conversely, if the market value of the stock exceeds the fair value of the stock, then analysts recommend that the stock be sold. Most stock rating systems give stocks one to five stars, with five being best. While some investors use a particular analyst's stock ratings as guidance, it is important to evaluate the criteria which they use to determine fair value, since the techniques they use are diverse and not all analysts are equally competent.

You could also interpret the rating as a ranking system in which the highest ranking means very credit worthy.

Debt rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's debt issues. It is analogous to credit ratings for individuals and countries. The credit rating is a financial indicator to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as Moody's, Standard & Poor's, and Fitch to have letter designations (such as AAA, B, CC) which represent the quality of a bond. Bond ratings below BBB/Baa are called junk bonds

Credit rating agencies
In short: credit rating agencies (CRAs) are companies specializing in investigating credit worthiness (abilty to pay back their loans) of companies and governments. In general concerning certain types of debt obligations like bonds and the debt instruments themselves. Practice is that companies use credit ratings to investigate whether investing in that company would be a good idea or not. But the last couple of years CRAs are primarily known for their ratings of governments and nations, think of Ireland, Greece, Italy and Spain.

In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.
Many people are unaware of what the actual debt ratings mean. The Moody's rating is based on statistical calculations of a company's likelihood of default. Most explanations give verbal descriptions for the ratings, such as Aaa = "Highest Rating Available" or Ba = "Low Grade", the first level of "Below Investment Grade" or the first level of "Junk Bonds". These descriptions seem useless without a way to determine what it all means in terms of the likelihood of default on the terms of repayment. To me, what is important is the chance that the company is not going to live up to its obligations, and that means the percentage of companies that default with a given rating. Moody's calculates this information, but it is hard to find a place that shows it.

Ratings by Moody's, Standard and Poors and Fitch

Rating examples:


(source wikipedia)

Criticism on the rating system
Untill the 1970 the ratings were done entirely indepentdantly. But in the early 1970s, (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings. Obviously the question arose on the impartiality of the three. One can image that securities issuing companies have an interest in good ratings, and the intention of companies shopping for good ratings, until they get one may be clear. In fact, it is not imaginative that getting ratings this way may have been one of the causes for the credit crunch, given the high ratings CDOs (collateralized debt obligations) and MBSs (mortgage backed securities) got. (High rating: buy, buy buy!)

Interview with John Kiff , Senior Financial Sector Expert Global Financial Stability Division in the Monetary and Capital Markets Department (IMF) on the debt/credit rating system. (Global Financial Stability Report)

Definition Wikipedia

Standard & Poors

See also Databases offering debt/ credit ratings (hyperlink)
IMF Direct Blog (John Kiff)
. End the credit rating addiction < blog item

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