Definition of Downgrade

What does the term "downgrade" mean? What is the definition of the term "downgrade"?

A "downgrade" occurs when an analyst lowers a firm's rating on a security.

Most brokerage firms use a basic rating system of "Buy", "Sell" or "Hold". Back in the late '90s/early '00s, many firms had a more complicated rating system that included designations such as "Strong Buy". In recent years, many brokerages have moved to a more simplified system.

"Buy" means that a brokerage recommends that you should add a security to your portfolio if you don't already own any. "Hold" means that a brokerage recommends that you keep holding a security if you already own it, but that people who don't own it shouldn't buy it. "Sell" means that a brokerage recommends that you sell a security if you currently own it.

If a brokerage announces that they are lowering their rating on a security from "Buy" to "Hold", this means that they are issuing a downgrade. Such a downgrade will usually have a negative impact on the price of a security.

Brokerages may issue downgrades for a multitude of different reasons. If they believe that a company's business is slowing down or that they face rough waters ahead, for instance, they may decide to issue a downgrade.

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