Hello, Everyone. Today we are going to discuss how the investment products are rated. The very essence of rating for financial products is a measurement of chances the investment product will meet its obligations.
Higher ratings mean that the instrument has better chances of meeting its obligations while lower grades indicate a higher default probability.
Credit rating
Credit ratings indicate the chances of a lender or investor in the product to return his money with interest and within the mutually agreed time-frame and policies.
Usually, credit ratings for companies and financial instruments are given in alphanumeric forms like AAA or AA+.
Products assigned AAA are considered having the highest safety degree with timely servicing of financial obligations. These financial products carry the lowest credit risk.
Rating agencies rate various financial instruments and often issuers of financial products are required to get credit ratings from two independent credit rating companies for the issue.
However, keep in mind despite the high rating is a factor to consider it does not mean directly investment advice to buy.
The credit rating assigned to a product at the time of offering may change over time. There are many instances highly rated corporate fixed deposits of a company were downgraded based on a reassessment of the company.
Credit rating is an oligopoly with the ‘Big Three’ credit rating agencies Moody’s Investors Service, Standard & Poor’s (S&P) and Fitch Ratings together cover 95% of this market.
Rating for trading strategies
The trading strategy of trader and indexes formed from such strategies are also considered financial products and are both a subject for assigning a rating.
There are a few criteria used to rate indexes, active asset management, and algorithmic trading bots. The positive factors for consideration are a good return on investment and low volatility while the negatives measuring risk are drawdown both concerning time and depth and high volatility.
One of the most significant existing problems with ratings currently applied for the trading strategies assessment is the issuers of the rating tend to overestimate return neglecting risks factors. Many forget to consider not losing capital is as important as to increase one.
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