IMPORTANCE OF CREDIT RATING FOR INVESTORS

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In our big wide world today, income can be generated quite easily. While most people work hard for years to ensure that they have enough savings when they retire, there are quite a few who make careful decisions on how to save their earnings. Some of them even employ consultants who manage their wealth for them. Although those are the people from the affluent part of the society, there are similar options for normal people like us.

Normal, educated and sensible people take simple efforts which have greater repercussions (a positive one) in their investment decisions. They read a lot of business newspapers and journals, closely follow credit ratings assigned to companies whose stocks they plan to buy, watch business information broadcasted over television and so on. If you haven’t heard of the impact that credit rating has on investments made by individuals, then this is the article for you. Before I jot down the points you need to know how credit rating agencies work.

Credit Rating Agencies

Some of the global leaders in credit rating are Standard and Poor (S&P) and Moodys. These two companies have presence across the world and make detailed study on the performance of companies, markets and even countries. Briefly, credit rating agencies, collect information from the company under discussion, meet the professionals of the company, discuss the various standpoints of the company related to their operational and financial performance, closely analyze these points and provide a rating based on their assessment of the risks involved. This rating is the critical part of the rating process for this is the health report of the company.

Importance of Credit Rating Agencies

  1. Credit rating agencies identify the operational and financial risks involved in a company. When they assign a rating to the company, they ensure that no one positive factor or one negative factor influences the rating. It is a collective report that debates on the pros and cons of the company and arrives at a suitable rating.
  2. Ease in deciphering the rationale behind the symbol. The final rating will be a symbol which will signify its meaning in a single sentence or less. This can be understood even by the not so involved financial readers.
  3. Credit rating from a trusted and recognized agency is highly credible. Ratings from agencies such as S&P and Moodys are used by reserve banks of various countries to monitor the health of some countries, big companies and so on. Hence the credibility of the rating. This is mainly because the rater and the entity being rated will have no links what so ever.
  4. Helps in choosing between alternatives. When you have a basket of investments to choose from the capital market, then credit rating paves the way to find the best alternative. It helps in assessing the risk profile of the combination of investments one plans to investment.
  5. One can independently choose to invest in stocks based on credit ratings assigned to them. There will be no requirement for financial consultants, brokers or intermediaries.

Have you decided on making investment plans now?

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