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Business intelligence is what S&P ratings are all about. This global corporation provides credit ratings on investments, including bonds and the stock market. Before you can understand what a good rating is, it helps to understand what S&P is, how it works and why it matters.
Standard & Poor's (S&P) began back in 1923 as the Standard Statistics Company. In 1941, it merged with Poor's Publishing, becoming Standard & Poor's. Once the two companies merged, it went from a 233-company stock market indicator to one with a stock index of 416 companies. It hit 500 in 1957, which is where the famous "S&P 500" originated and combined with Dow Jones Indices in 2012 to become the industry leader. Today, S&P provides ratings for 28 countries to deliver market intelligence that investors can count on.
How Are Ratings Determined
To determine S&P ratings, their analysts pore over annual reports, news articles, press releases and interviews with a company's management team. They combine that information with details about the company's operations, policies and its financial outlook to evaluate the general creditworthiness and independent credit ratings. While these ratings shouldn't be taken as investment recommendations or predictions of default probabilities, as noted by The Balance, they do provide the S&P's opinion about the bond or stock's issuer's ability to meet its financial obligations. It's a rough structure designed to give investors a little basic insight, but it can't account for unforeseen developments or events.
S&P Ratings: From Best to Worst
S&P ratings are expressed as letter-based grades. The best is AAA, and the worst is D. Multiple letters, pluses and minuses are all used to indicate a company, stock or bond's strength. For more information on the different ratings, consider the following indicator of the ability to meet financial commitments:
- AAA: Extremely strong
- AA: Very strong
- A: Strong but susceptible to changes in circumstances
- BBB: Adequate but more susceptible to adverse economic conditions
- BB: Less vulnerable in the short term but facing ongoing uncertainty
- B: More vulnerable to adverse conditions but currently able to meet financial obligations
- CCC: Vulnerable and dependent on business conditions conducive to meeting financial obligations
- CC: Highly vulnerable and projected to default
- C: Highly vulnerable, with the recovery of debts projected to be less than higher-rated commitments
- D: Default has already occurred
Why S&P Ratings Matter
In addition to giving you a better idea about the ability for the issuer of a bond to pay its debt, S&P ratings also affect interest rates. As The Balance notes, the higher the letter grade, the lower the interest rate the issuer typically has to pay. This is directly related to the amount of risk that you, the investor, have to take. Less risk, less return.
Types of S&P Ratings
Now that you understand what S&P ratings mean in general, consider the different types of ratings. Different lists offer insight into different types of markets. For example:
- S&P 500 provides ratings for the largest of the United States' 500 publicly traded companies
- Standard & Poor's Underlying Rating (SPUR) offers an opinion on the credit quality of a municipality
- S&P 500 Buyback Index tracks the performance of the 100 companies in the S&P 500 that have the highest buyback ratios
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