Buy, Hold, or Sell: Understanding Stock Ratings

Research analysts often label a stock as "buy," "sell," or "hold," and sometimes add other descriptions. But what exactly do these stock ratings mean, and how might they help you pick stocks to buy right now?

Why Analysts Issue Stock Ratings

Brokerage firms and research analysts use various methods—such as studying a company's accounting data, analyzing the industry, or interviewing management—to predict whether a stock's price might rise or fall. Their findings can influence investors who are looking for stocks to buy right now or deciding whether to sell certain shares. When an analyst changes a rating (for example, from "buy" to "hold"), it can prompt investors to act, which may affect the stock's price.

Regulators like the Securities and Exchange Commission (SEC) set rules so that research reports are transparent and objective. That way, investors get information they can trust, and ratings aren't just benefiting the firm or the analyst personally.

Even though stock ratings can offer valuable insights, you should still do your own homework. Think about your financial goals and risk appetite vs risk tolerance before making any final decisions.

Common Types of Ratings

Most rating systems include these basics:

- Buy: The analyst believes it's worthwhile to purchase the stock now.

- Sell: The analyst thinks you might be better off selling the stock.

- Hold: The analyst suggests keeping the stock in your portfolio but not buying more.

Some firms use a slightly different scale, such as using numbers, letters, or terms like "positive," "neutral," or "negative." Others add nuances like "outperform," "underperform," "strong buy," or "weak sell." They might also include a time frame, such as "long-term" or "short-term."

For instance, a stock may be labeled "long-term neutral" and "short-term buy," which can seem confusing. To address this, regulators require brokers to clarify what these ratings mean and how they reach their conclusions.

FINRA Rules and Requirements

While the SEC oversees the entire securities industry, the Financial Industry Regulatory Authority (FINRA) is responsible for regulating broker-dealer firms in the U.S. FINRA has rules to ensure:

1. Research is based on reliable data.

2. Any rating, recommendation, or price target has a reasonable basis.

3. Ratings reflect the actual research findings, not conflicts of interest.

4. Research reports include important details, such as when a rating was first assigned or changed, if it has been in place for at least a year.

Firms don't have to give ratings in their reports, but many do because investors find them helpful. If a firm has a custom rating system, it must explain it clearly in the report. A "hold" can't secretly mean "sell," and a "buy" shouldn't really be a "hold."

Additionally, firms must disclose the percentage of securities that fall under each rating category. They also have to show what percentage of rated companies were their investment banking clients in the past year. This helps investors spot potential biases.

If a stock has been rated for at least a year, research reports need to include a chart showing the stock's daily closing prices and note when each rating or price target was assigned. This visual helps investors see how the rating compares to the stock's actual performance over time.

Example of Rating Disclosures

Some stock research platforms, include data with the stock's price history, past ratings, and the distribution of all ratings across different companies. This way, you can see how an analyst's stance has changed and how the stock actually performed.

Where to Find Stock Ratings Online

Many brokerage websites offer stock ratings in their research sections. Another option would be to use the Financial Modeling Prep Grade News API Endpoint. This endpoint provides JSON data that looks like this:

[ {

"symbol": "AAPL",

"publishedDate": "2025-01-03T10:24:50.000Z",

"newsURL": "https://thefly.com/permalinks/entry.php/id4045077/AAPL-Apple-price-target-raised-by--at-Bernstein-heres-why",

"newsTitle": "Apple price target raised to $260 from $240 at Bernstein",

"newsBaseURL": "thefly.com",

"newsPublisher": "TheFly",

"newGrade": "Outperform", "previousGrade": "Outperform",

"gradingCompany": "Bernstein",

"action": "hold",

"priceWhenPosted": 242.7707

} ]

From the above data, after inputing the stock ticker to the endpoint, you can extract stock Action, which is Buy, Sell, or Hold, Analyst Grade, Grading company, and you can also read the news mentioning stock target price and grade change. You can use this data in your custom app or perform manual research.

Stock ratings can help you gauge which stocks to buy right now or which ones might be worth selling. Regulators require firms to follow strict guidelines for transparency and objectivity, reducing conflicts of interest in research reports. Still, it's important to remember that these ratings don't guarantee future performance. Always consider your personal goals, time horizon, and comfort with risk when making investment decisions.