Posted in Finance, Accounting and Economics Terms, Total Reads: 639
Definition: Financial Ratings
By its basic definition, rating means categorizing an object into a certain class based on its credentials. On the same note, rating in finance means to classify a financial instrument, an economy or a business into a certain class based on its performance or its ability to pay back (for a business or economy). A high rating means the financial instrument is performing well in the market or the economy is doing well. Rating is also given to debtors based on to their chances of defaulting. Based on these ratings, the investor decides whether to buy that particular financial instrument or whether to invest in a particular business or economy. Various rating agencies like S&P, Moody’s, Fitch, etc. assign ratings based on various factors.
Eg – S&P has a scale from AAA to C status where AAA is the highest and junk status is the lowest. A rating of C would mean the entity has high chances of defaulting whereas a rating of AAA would mean that the entity can easily pay back on the investment made.