Q: Is there a definitive listing of what all the analyst ratings mean? I'm pretty much guessing. -- C.G., from e-mail

A: Many publicly traded companies are "covered" by brokerage firms. These firms employ analysts to research a company, follow its industry, talk to its executives and competitors, and issue research reports. These reports are encapsulated on the front by a simple one- or two-word analyst rating.

Confusingly, the more than 50 firms that provide research do not use a standardized language for these ratings. Some terms are calls to action ("buy"), whereas others are based on the analyst's opinion of how well the stock will do compared to the overall market ("outperform"). The ratings can be grouped into four general categories, based on predictions that the stock will ...

• really beat the market: Usually expressed in the form of "buy," "strong buy" or "market outperform." McDonald Investments has an "aggressive buy" rating, so stay out of their way when that gets issued.

• modestly beat the market: Here's where things get squirrelly. You see, brokerages use the same terms for different opinions. Thus, a stock with a "buy" from Salomon Smith Barney is getting the firm's highest rating, whereas a "buy" from Piper Jaffray is not as good as a "strong buy." You will also see "outperform" and "accumulate" for these "bridesmaid, not the bride" companies.

• do about as well as the market: Mostly referred to in terms such as "market perform," "hold" and "neutral."

• not beat the market: A lot of "underperform" and "sell" ratings are used to express this, with an occasional "reduce," "underweight" or "source of funds" (i.e., generate commissions by selling this and buying something from the "really groovy" list). S&P Equity Research uses "avoid," which sounds a bit cliquish to us.

There are two problems with analyst ratings. First, a rating is often based on a price target, which is a guess at where the stock will be trading within the next six to 12 months. Fools know that no one can accurately predict the market's movements in the short term, let alone a stock's exact future value.

Secondly, the system is infected by a serious conflict of interest. Brokerage firms do more than research companies and make goofy commercials. They also provide consultation and investment banking services to corporations. That means BIG bucks. For example, 32 percent of Goldman Sachs' revenue for the first half of this year was derived from investment banking services. That's why you won't see many "sell" ratings: Brokerages don't want to alienate potential clients by talking smack about their stocks. (In fact, many firms don't even have a rating below the "hold"/"neutral" status, while others choose a softer phrase such as "speculative" instead of "sell.")

Earlier this year, Borders Group hired Merrill Lynch as a consultant. On the same day, a Merrill Lynch analyst raised his rating on the company. Coincidence?

This is not to say that research reports are useless. They are often prepared by bright folks who know the company, follow the trends of its industry, and can provide insight into its business prospects. Just don't get too caught up on ratings. If you just can't let go of those magic words, here are the Fool's suggestions for fulfilling the rating prophecy.

Market outperform: Educate yourself and make your own investment decisions.
Market perform: Invest in an index fund.
Neutral: Switzerland.
Market underperform: Choose managed mutual funds, most of which underperform index funds. Or you could pay outrageous brokerage commissions for subpar returns.
Reduce: Slim Fast.

WHAT NOW? Here's a list of which brokerage firms use what terms.

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