Financial analysts place recommendations on securities to give their clients or investors a general idea about the expected performance of that security looking forward. These recommendations are adjusted when the basis behind the recommendation changes, such as movements in the price of the stock or newly released data in the company’s financial statements.

The most common recommendation issued by analysts is ‘Buy ’, ‘Sell’ or ‘Hold’. Exact definitions vary by brokerage but terms such as ‘outperform’ means a stock is expected to do slightly better than the market return. ‘Underperform’ means the reverse.

An ‘Upgrade’ is a positive change in the rating of a security and is usually triggered by a steady improvement in the fundamentals and financials of the entity that has issued the security. Upgrades to the credit rating of corporate issuers of debt securities are issued by rating agencies, such as Standard & Poor’s. Upgrades to investment ratings for equities and fixed-income securities are issued by equity and bond analysts respectively at brokerage houses. In the context of portfolio management, ‘upgrade’ also refers to a strategy whereby the risk profile and quality of the portfolio is improved by including blue-chips stocks in it, while eliminating speculative ones.

A rating agency may upgrade the credit rating of an issuer from AA+ to AAA. Such a move would have a positive effect on all outstanding bonds and other fixed-income instruments of the issuer. An equity upgrade would be an analyst raising the investment rating for a particular stock (or sector) to ‘buy’ from ‘hold’. An upgrade of this nature would sometimes be accompanied by an upward revision in the analyst’s target price for the stock.

A ‘Downgrade’ is a negative change in the rating of a security which occurs when an analyst downgrades a stock from a buy to a sell. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company’s operations, future outlook or industry.