Understanding the Credit Rating System

The credit rating system enables you to research companies that you are considering investing in. There are three main companies that offer ratings; Standard & Poor, Fitch and Moody’s.

Standard & Poor's and Fitch assign credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, or D. Moody's assigns credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, or C.

S&P, Moody and Fitch will also assign intermediate ratings at levels between AA and B (e.g., BBB+, BBB and BBB-), and can sometimes also offer guidance for the future as to whether the company is likely to be upgraded, downgraded or uncertain.

There is a strong link between the risks of “stock market investments” and the profit you can receive from them. In order to make a profit, you should take a few risks but be careful not to risk too much.

This means that AAA companies are very good and unlikely to lose value; however, it also means the profit could be limited. You could receive more or less the same interest as with saving accounts.

If you invested in BBB, you would take some calculated risks, but make some profit. The lower quality shares you buy, the more risks you would take and the more return you would have. However, in order to reduce risk, you may not want to invest in a quality under CCC. Starting from CC you will have a lot of unknown parameters you can’t control because of the poor quality of the shares. The probability of losing your money would then be sky-high.

When you invest it is important you thoroughly research the companies, or funds in which you intend to invest in. In the new age of internet, it is easy to acquire true information. The worst thing to do is listen to rumours.

About The Author-- Emma Bunting is currently working for Stadia Trustees who specialise in SIPPs.

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