Legal Definitions - security grading

Definition: Security grading is the process of classifying a security based on its financial strength, stability, or risk. This is done by firms such as Standard and Poor's and Moody's, who assign a security rating to each security.

Example: Let's say you want to invest in a bond. Before investing, you want to know how risky the bond is. You can look up the security rating assigned to the bond by a rating agency like Standard and Poor's. If the bond has a high rating, it means it is considered less risky and more stable. If it has a low rating, it means it is considered more risky and less stable.

Explanation: The example illustrates how security grading works in practice. By assigning a rating to a security, investors can make informed decisions about whether to invest in it or not. A high rating indicates that the security is considered a safer investment, while a low rating indicates that it is considered riskier. This helps investors manage their risk and make more informed investment decisions.