Ratings, usually expressed in symbols, are a simple and easily understood tool helping the investor to make judgments on investment decisions in different securities including debt and equity instruments on the basis of their underlying quality. Rating of an equity instruments indicates the current opinion on prospects of return from the equity. Credit rating of debt instruments indicates the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. Thus rating is focused on communicating to the investors, the relative ranking of the default loss probability for a given investment, in comparison with other rated instruments. In case of equity instruments, judgment is made on the sensitivity of the return from the equity instruments to changing market conditions and offer the greatest stability of returns to shareholders. Debt rating is based upon the relative capability and willingness of the issuer of the instrument to service the debt obligations (both principal and interest) as per the terms of the contract.
Besides equity and debt instruments rating, the range of rating has further expanded to other areas such as entity rating (measuring the overall strength of an organization), financial strength/claims paying ability rating of insurance companies, corporate governance & stakeholders value addition rating etc.