Takeaways
- The Standard and Poor’s (S&P) was founded in 1860 and is now called S&P Global.
- The S&P currently has over 1 million outstanding credit ratings for debt securities.
- The S&P, Moody’s, and Fitches are the three credit rating agencies investors use.
- The S&P 500 is one of the most famous financial indices stock investors use.
- Bond investors assess the level of investment risk by using the S&P's credit ratings letter scale, which ranges from AAA to D, for corporate and government debt.
What Is Standard & Poor’s?
Standard & Poor’s, commonly referred to as just “the S&P,” is one of the world's largest and most influential financial companies. Founded in 1860, the S&P has been shaping financial markets through its stock indices and credit rating businesses. In 2016, the company officially changed its name to S&P Global to signify its global reach. [1]
Standard & Poor’s has earned a reputation for its credit rating capabilities. These ratings give investors an estimation of the creditworthiness and quality of corporate bonds and other debt securities. Investors use this information to assess investment risks, which helps with price discovery. S&P ratings have been used for decades by institutional investors and retail investors alike to make better-informed investment decisions.
Read More: 7 Types of Bonds
The S&P credit rating agency assesses the ability of a bond issuer, either corporate or government, to meet debt obligations by evaluating a wide range of criteria, including a company’s projected financial performance, broader macroeconomic conditions, and management practices. Higher credit ratings indicate the issuer is more likely to repay its debt. In contrast, a lower rating reflects an increase in default risk or failure to pay interest payments or repay principal.
The S&P also maintains a range of equity indices, the most famous of which is the S&P 500. This index tracks the performance of the 500 largest publicly traded U.S. companies listed on stock exchanges, making it one of the best benchmarks of U.S. general economic health.
Standard & Poor's credit rating and stock indices directly impact the debt and equity capital markets and help guide investors to make smarter investment decisions.
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How Standard and Poor’s Works
The S&P works by creating and providing two primary types of financial information: credit reports and market indices.
- Credit Rating System: One of the most prominent financial metrics produced by S&P Global is its credit ratings, which serve as an impartial report card for the economic health and creditworthiness of debt issuances, such as bonds or debt-based securities. Credit ratings are applied to issuances by corporations, financial institutions, municipal governments, and structured and project finance.
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Standard & Poor's uses a proprietary credit rating methodology to determine and assign a credit grade. S&P credit analysts examine the issuing company's financial statements, market position, competitive moat, industry trends, and macroeconomic factors. A credit grade is produced after these variables are filtered through their credit rating models. This letter grade assignment reflects S&P Global's option about the credit risk, which is an opinion about the security issuer's willingness and ability to meet its financial obligations on time and in full.[2]
AAA-rated securities possible rating, and D-rated securities have the worst (more on this below).
- Equity Indices: S&P is also known for its stock indices, which track the performance of different segments of stock markets around the world. The most well-known equity index is the S&P 500, which, according to S&P Global, is regarded as the single best gauge of large-cap U.S. equities.[3] The S&P 500 provides a snapshot of the 500 best large-capitalization companies currently traded and covers roughly 80% of the available stocks in terms of market capitalization.
Stock indices maintained by Standard & Poor’s are commonly used as benchmarks by stock traders, financial media, and fund managers at institutional investment entities, like hedge funds and pension funds. These indices are a barometer of market performance and guide investment decision-making.
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S&P’s Credit Rating System
The S&P credit rating system is one of the foundational elements of the global debt markets. This credit rating system helps streamline the creditworthiness assessment a particular debt issuer and gives investors a common language to compare the relative credit risk among different bond issuances and bond fund ratings.
Credit ratings are forward-looking opinions and fall into two general categories: investment grade and non-investment grade. Here we look at how they differ:
Investment Grade
Investment-grade ratings are the top tier in the credit rating system. They cover a range of letter grades from AAA to BBB-, with AAA being the highest. This rating denotes the lowest potential risk and the highest likelihood that the issuer will meet its debt obligations. Bonds that earn the coveted AAA ratings tend to be larger, financially stable institutions that maintain consistent, ongoing revenue streams and hold minimal default risk.
Investors consider investment-grade bonds the cream of the crop. Fixed-income investors looking to build steady income returns while assuming as little risk as possible favor investment-grade bonds. Bonds that carry a rating of BBB or better are still considered investment-grade, though they have an incrementally higher risk compared to higher-rated bonds.
Beginner investors and investors who value consistency frequently gravitate toward investment-grade bonds, which they use to build a source of stable and reliable passive income streams. Because they are lower risk, however, they tend to earn less than high-yield bonds and other non-investment-grade bonds.
| Standard & Poor's Rating | Description |
|---|---|
| AAA | Highest rating, low risk. |
| AA | High quality, strong company. |
| A | High quality, low risk |
| BBB | High quality, growing risk |
| BBB- | Lowest high-quality rating |
Non-Investment Grade
Bonds considered non-investment grade are sometimes known as junk bonds or speculative bonds. They carry ratings from BB down to D. These bonds are lower rated because they have a higher risk of missed interest payments or overall default.
Companies and institutions issuing non-investment grade securities usually have unstable or unpredictable revenue streams, are overleveraged (their debt-to-income is too high), or face increasing competitive pressures. The bonds in this rating category carry a higher default risk and thus command higher annual percentage yields (APY).
Depending on your portfolio, you could have a spot for non-investment grade bonds. Of course, this depends on your risk tolerance, investment time horizon, and portfolio allocation. While there is the potential for high returns on these investments, they also typically have higher volatility. It would help if you considered the possibility of suffering an investment loss with this investment and carefully evaluated the bond before making any investment decision.
| Standard & Poor's Rating | Description |
|---|---|
| BB+ | Highest speculative grade |
| BB | High risk, less vulnerable to near-term events. |
| B | High risk, vulnerable to near-term events |
| CCC | High risk, needs favorable events |
| CC | High risk, default is close |
| C | High risk, default is imminent |
| D | In default or bankrupt |
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History of Standard & Poor’s
The S&P started as a small financial publishing company that slowly grew into the prominent and influential credit rating agency it is today. The company began in 1860 when Henry Poor started publishing on the history of the railway system and companies. This publication marketed an inflection point and demonstrated the appetite for market intelligence among investors even in the late 1800s.
From there, the company expanded its publishing insights and developed a proprietary credit rating system. The system took off as markets grew, and investors needed more transparent and standardized ways to evaluate and compare the risks associated with debt and credit instruments.
Through tremendous effort, the Securities and Exchange Commission (SEC) eventually recognized S&P Global as a statistical rating organization. Investors use the S&P credit ratings system as an easy-to-reference standardized way to assess a company's creditworthiness. These ratings allow investors to quickly compare thousands of debt securities to see what fits in their investment portfolio.
Smart Summary
Standard and Poor’s is a leading financial intelligence and publishing company that produces credit ratings for bond issuances and manages equity indices, like the S&P 500. The credit ratings are used by retail and institutional investors to quickly compare debt security issuances by corporations, financial institutions, and governments. These credit ratings are your cheat sheet into the creditworthiness of these issuances and a gauge of how these companies intend to make their debt payments in full and on time. Read more about the different types of bonds.
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(1) SPGlobal.com. Accelerating Progress Since 1860. Last Accessed January 13, 2025.
(2) SPGlobal.com. Credit Rating. Last Accessed January 13, 2025.
(3) SPGlobal.com. S&P 500®. Last Accessed January 13, 2025.
