How to Investors benefit from Credit Rating?
Several benefits directly accrue to investors through rated instruments. Some of the benefits are:
1. Protection against bankruptcy
Rated instruments provide investors an idea about the financial strength of the issuer company. This enables them to evaluate the credit worthiness of the corporate instrument. Besides, the rating symbol suggests the degree of risk involved in it. Highly rated instrument of a company assures the investors safety of investment and protection against bankruptcy.
2. Easy recognition of risk
The rating symbols provided by credit rating are easily recognizable. Investors can perceive the risks involved in investments by knowing the rating they obtained. Credit instruments are backed by the financial strength, but they cannot be easily assessed by the investors themselves. The credit rating agency collects, analyses and interprets the complex information in a simple manner for the benefit of investors.
3. Reliability of the issuer
Hiring credit rating agencies suggests that the management of the company is ready to throw open its operations for an independent scrutiny. The rating agency is quite independent of the issuer company. It has no business connections or any relationship with the company. In other words, it has no vested interest. So, rated securities enhance the dependability of the rated instruments for investors.
4. Independent investment decision
Investors rely on rated instruments. Thus, they are relieved from the botheration of knowing the intricacies of financial analysis of the company. Through rating symbols, investors are in a position know about the actual strength, financial standing and management efficiency of the company. They need not depend upon the advice of financial intermediaries, portfolio managers, etc. As the rating symbol indicates the credit worthiness of the instrument and the degree of risk involved in it, the investors can make direct investment decisions.
5. Low cost information
Credit rating provides valid information about the company to the investors at a very low cost. Analysis and interpretation of complex data are highly expensive which the investor, as an individual cannot afford. As processing of information is done by a specialized agency, investors can trust the rated instruments.
6. Wide choice of investments
In the present investment market, investors have a wide choice of credit instruments to choose from. They can choose a particular instrument according to their risk profile and diversification plan. Credit rating provides an unbiased guidance to the investors in making a wise a choice of the investments.