With so many publicly traded stocks available on the United States markets alone, it can be difficult for the average investor--or even the professional investor--to properly research and analyze them all. That is why many firms offer stock market ratings. These ratings come from the firm's own analysis of the company in question. They represent the firm's opinion of that company's stock trading prospects.
- Review the rating system being used. While many firms still use the traditional "Buy, Hold, Sell" rating structure, there are many other systems in use as well. These systems may include additional terms like "under perform," or they may use letter grades or number rankings instead.
- Understand letter grades as "A" being the highest. Additionally, higher letters always trump pluses and minuses. Thus, a "B++" rating is still lower than an "A--" rating.
- Understand number based ratings according to the rating company's methodology. For example, the company Zacks ranks stocks from 1 to 5, with 1 being the highest. Zacks Ranks are broken out by percentage. Only 5 percent of rated stocks can be Rank #1. 15 percent can be Rank #2. 60 percent are Rank #3.15 percent are Rank #4. 5 percent are Rank #5.
- Obtain the rating for the security of interest. A full report will consist of not just the rating itself, but a summary of the rational for the rating. Do not rely on just the rating itself, as it may be qualified by other comments in the report.
- Review the rating distribution for the firm in question. Some firms are more likely than others to rate a stock high or low. Knowing this is key to determining how much weight can be given to a rating. If the firm in question has a larger number of BUY ratings than any other, then a BUY rating carries less value. A SELL rating from the same firm should be viewed with greater value due to its rarity.
- Make a decision. Whenever possible, only buy new stocks with a strong buy equivalent rating. A buy rating can be used to add to an existing position. Hold ratings should encourage the investor to maintain an existing position. Sell ratings should be used to lighten up on an existing position, while strong sell ratings should encourage the investor to delete the holding from her portfolio as soon as possible.