An investment grade is a type of rating given to a stock or bond that lets the investor know that it is relatively low in risk when it comes to defaulting or meeting its financial obligations.
We’ll take a look at everything you need to know about investment grading, as well as provide some examples of real-world companies that have various ratings when it comes to investment risk.
A bank, for example, was rated to be stable and maintained good stock and company ratings. You can learn more about it by reading this finance article.
What Exactly is Investment Grading?
Investment grading is when a credit rating agency, typically Moody’s or Standard & Poor’s, rates the creditworthiness or risk of default associated with a security (stock or bond).
All credit rating agencies use the same letter-based scoring system. The best score a company can receive is a AAA, and the worst is a D. If you want to know what each score means, we’ve outlined all of the possible scores a security can receive below:
AAA: This is the highest rating a security can receive, which indicates they have a very low credit risk and have a strong capability to meet financial obligations. Interestingly, only two stocks have this rating: Johnson & Johnson, and Microsoft. If you want to learn about how these companies remained the only two to be rated the highest investment grade possible, outlasting almost 60 other securities including those of the U.S Government, then read this Motley Fool piece.
AA: AA is also a good rating, but has a high credit quality and slightly higher level of risk when compared to securities rated AAA. Note that this rating can come in a few different forms, AA+, AA, and AA-.
A: A singular A rating marks the beginning of the medium credit quality, still considered to be investment grade of course. An “A” score signifies that the security is an upper-medium credit quality with some risk but overall considered to be stable. Like AA, A can also come in A+ and A-.
BBB: Securities rated BBB are considered to be on the lower end of medium credit quality, with low to moderate credit risk. They are still investment grade securities though, and can come in BBB+, BBB, and BBB-.
Not Recommended as Investment
The following scores are deemed to be high yield or junk, and are not considered to be investment grade securities.
BB: This rating indicates the security is non-investment grade, has considerable credit risk, and medium to high chances of defaulting on financial obligations.
B: Securities with B ratings are deemed to have a high credit risk and are expected to be extremely vulnerable to adverse economic conditions.
CCC: Securities rated CCC, CCC+, or CCC- are going to be highly speculative, which means a lot of credit risk and high risk of defaulting on financial obligations.
C: A rating of C, C+, or C- is essentially the lowest rating a security can receive without having already defaulted on its debts. They have an extremely high risk of defaulting, and have a very low credit quality.
D: Securities rated D have defaulted on their financial obligations.
You should now have a better understanding of how investment grading works and how to interpret the various ratings a stock or bond may receive. If you’d like to learn more about investment grading, check out this Investopedia article.