Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: What Does It Mean When a Stock Is Downgraded?

By Matthew Frankel, CFP® - Dec 1, 2017 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Analyst upgrades and downgrades can certainly move a stock. Here’s what you need to know.

Q: One of my stocks fell 5% the other day, and when I tried to find out why, all I learned is that an analyst had downgraded the stock. What does this mean, and should I be worried?

Analyst opinions can certainly move stocks -- sometimes by a lot. For example, an analyst recently downgraded Square, and the stock plunged by 16% as a result.

However, my advice is to take an analyst downgrade with a grain of salt. It's important to keep in mind that a downgrade is simply a change in a particular analyst's opinion about a stock. For example, the Square downgrade was because an analyst felt that the company's experimentation with bitcoin won't have the positive effect the stock market seems to be expecting. In addition, the financial institution that employs the analyst generally releases the report to its own clients, and many may choose to sell, creating downward pressure on the stock.

In fact, analyst downgrades can create buying opportunities in solid companies on which you've done your own research and feel that there is strong long-term potential.

However, a flurry of downgrades on the same stock in a short period of time, or a downgrade that fundamentally challenges your investment thesis can be a sign of trouble. For example, if several analysts downgrade a stock and all of them say that there's a strong possibility of a dividend cut, this could be a good reason to take a closer look at the stock -- especially if the dividend is one of your main reasons for owning it.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.