How the rating works and who gives the ratings

When we turn on the TV we hear about AAA or BB and other letters of the alphabet with positive or negative sign, but in practice how does the rating work and who gives the ratings?

Rating is an evaluation that is issued by agencies such as Fitch, Moody’s, Standard & Poor’s on for example a stock or bond. Simple-word rating agencies are located in the middle between securities issuers and those who buy the product as funds or private investors. The role of rating agency is to carry out an in-depth analysis of the issuing companies, assessing health and solvency by making a judgment as consistent as possible with commitments made by the company towards creditors.

Rating is published through the media and internet and is visible to everyone, this communication is the subject of hikes or downturns on the financial markets because investors are conditioned in operational and strategic choices. I open a parenthesis, when you trade the market in addition to analyzing macroeconomic data, technical analysis tools,social networks of the most influential people pay attention to the rating agencies because there may be surprises in the market.

Fitch, Moody’s, Standard & Poor’s have decisive power because as mentioned before they are able to positively or negatively influence a company’s stocks and reliability of a country. Their analyses also focus on government debt, industrial production and other parameters that determine the future market outlook. Remember that rating is continuously monitored by analysts, if some parameters of a company change over time the agency can review its rating by raising or lowering.

Let me give you a silly example if France has an A-rate and Usa AAA who is most reliable? The answer is easy so if a fund is looking for a safe investment it will opt for Usa in this case however there is a but…

Do not be influenced by ratings, I tell you from experience, checking information of these agencies should be a support not a cause of operation without risk. The work of Fitch, Moody’s, Standard & Poor’s is not easy because evaluating a publicly traded company has so many elements to analyze that over time have become increasingly complex. In 2008 and during the internet bubble in the 90’s do not forget that some ratings were positive and seemed reliable, so to buy on the market,however some balance sheets did not represent the reality (we know then how it ended).

Rating is just an aid you receive from agencies,your job is to develope your best strategies and trading system.