Buy, Hold, Sell: What Analyst Stock Ratings Mean

Most analyst stock ratings seem straightforward: buy, sell, or hold. But what about phrases like long-term outperform or short-term underperform? These ratings can be confusing, but ultimately, they're just ways analysts categorize stocks based on their expected performance.

Analysts at investment banks, brokerages, and independent research firms often evaluate public companies using fundamental financial data, industry research, and management interviews. Their goal is to assess whether a stock is fairly valued, overvalued, or undervalued—and then provide actionable guidance to help investors make informed decisions.

Many brokers and investors refer to analyst recommendations to help them choose investments that are appropriate for their portfolios. Changes to these recommendations can prompt buying or selling activity, which in turn affects stock prices.

The Securities and Exchange Commission (SEC) and other industry regulators have rules in place to promote research objectivity and transparency, help ensure investors receive reliable information, and prevent the firm or analyst from personally benefiting from the ratings they issue.

Investors should always do their own research and consider their personal financial goals, but ratings can be useful tools to help make more informed investment decisions.

As noted, the most common analyst ratings are buy, sell, and hold. Generally, a buy rating suggests the covering analyst or group of analysts thinks investors should buy now, a sell is one that analysts think investors should sell, and a hold is one that analysts think is performing well enough to keep in a portfolio but not one that's worthy of additional investment.

However, not every investment bank, brokerage, or research firm uses these basic ratings. Some firms use letters, numbers, or different words—like positive, negative, and neutral—to more accurately describe their analysts' opinions.

Some rating systems also include ratings like outperform or underperform, which are designed to reflect how a stock is expected to perform relative to a benchmark like the S&P 500^® Index. Others use intensifiers, such as strong buy and weak sell, to capture analysts' level of confidence in a stock. And some add time guidance to their recommendations—such as long term or near term—to manage investors' expectations, account for cyclicality, or reflect current macroeconomic or industry conditions.

While ratings are mostly straightforward, the nuances can be confusing. To help investors understand the reasoning behind ratings, industry regulators have adopted a series of rules for broker-dealers, research firms, and investment banks that offer equity ratings.

While the SEC broadly regulates the securities industry, the Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that operates under the SEC, overseeing U.S. registered broker-dealers and the conduct and ethics of people who work within those firms.

FINRA requires firms to establish procedures that ensure facts in research reports are based on reliable information. Any recommendations, ratings, or price targets in reports must have a reasonable basis. Ratings should reflect research outcomes, be based on facts, and remain independent of any conflicts of interest the firm or its employees may have. Research reports containing ratings or price targets must also include certain disclosures. For example, if a firm has assigned a rating to a security for at least one year, the research report should include a line graph showing the security's closing prices and indicating when a rating was assigned or changed.

Research reports don't have to assign ratings, but many clients like to see them. Likewise, firms don't have to use a proprietary rating system, but if they do, they must put a description of it in all research reports. This should include the meaning of each rating in their system, the time horizon, and any benchmarks used. For example, is "outperform" relative to the entire stock market, an industry index, or the firm's coverage universe? This information must be provided to investors.

In addition, the firm must disclose the percentage of securities that receive each rating—and the percentage of companies within each rating group that were investment banking clients at any time within the previous 12 months. This helps investors identify potential conflicts of interest.

Below are some disclosures included in a Schwab Equity Ratings^® Report on Uber Technologies (UBER), including price performance, ratings changes, and the distribution of ratings across the universe of companies that have a Schwab Equity Rating.

The equity ratings system used by the Schwab Center for Financial Research considers growth potential, performance quality, investor sentiment, stability, and valuation.

Schwab Equity Ratings assign securities a grade from A to F:

• A rating—Strongly Outperform: If an investor is looking to add a stock to their portfolio, A-rated stocks may be among the strongest candidates to consider.
• B rating—Outperform: An investor looking to add a stock to their portfolio should also consider B-rated stocks, although preference should be given to A-rated names.
• C rating—Marketperform: An investor who has a C-rated stock in their portfolio should consider continuing to hold the stock but might monitor the stock's ongoing performance and compare the potential benefits of replacing the C-rated name with a stock that has a higher rating. An investor driven solely by analyst ratings would not usually consider purchasing C-rated stocks.
• D rating—Underperform: An investor holding a D-rated stock should consider whether it's appropriate to continue holding that stock in their portfolio. An investor would not usually consider purchasing D-rated stocks.
• F rating—Strongly Underperform: An investor holding an F-rated stock should consider whether it's appropriate to eliminate that stock from their portfolio. An investor would not usually consider purchasing F-rated stocks.

Schwab offers clients several sources to find ratings and ratings changes:

• Schwab Equity Ratings and third-party research reports from Morningstar, CFRA, Market Edge, LSEG, and more are available to Schwab clients. To find these reports, select the Research tab (1), then Research Tools (2). Next, enter the ticker symbol or company name (3) and select the desired research report from the Ratings & Reports column (4).

• Clients can also find recent ratings changes from Schwab Equity Ratings, Morningstar, CFRA, and more on Schwab.com. To do this, select the Research tab (1), Research Tools (2), and then Rating Changes (3).

Ratings can offer investors useful guidance about whether a stock may be worth considering for a portfolio or whether it's best avoided for the time being. Regulations require firms that issue ratings to be transparent and objective in research reports and disclose any potential conflicts of interest. However, investors ultimately need to make their own decisions. After all, ratings are not guarantees—even when the underlying analysis is conducted responsibly and based on sound research.