Ever tried to decipher an equity research report? If so, you are likely familiar with the ratings used by analysts (such as buy, hold, accumulate, outperform/underperform, accumulate, neutral, overweight, etc.) to sum up their opinion of a stock. What do these terms actually mean? Most investors just want to know whether a stock is "good" or not, but how can an investment decision be reached when you practically need a dictionary to sort through the jargon? 

In this article, we'll look at how to decipher the analyst rating system and discuss how useful analyst ratings are for the average investor.

The Background on Analyst Reports
A research analyst is a financial professional who researches investments and makes recommendations. Most people think of analysts as equity analysts, who, as the name implies, research stocks (equities). In fact, analysts analyze everything from bonds to derivatives. In this article we'll be talking about equity analysts.

Analysts release their findings in research reports, which can be anything from one- or two-page summaries to detailed documents that are dozens of pages long.

An analyst report will generally contain the following items:

1. A detailed description of the company and its industry including relevant financial numbers. 2. An opinionated thesis explaining why the analyst believes the company will succeed or fail. 3. A target price for the stock over the next year (or two). 4. A recommendation or rating.

Most analysts put plenty of work into these reports, often traveling to the company's headquarters and getting a first-hand tour of operations. (For related reading, see Three Kinds Of Analysts And What You Need To Know About Them.)

Not All Ratings Are Created Equal
The bulk of an analyst's work is contained in the body of the research report. Despite this, the rating gets the lion's share of attention. It's easy to understand why: ratings are the sexy sound bites that can be easily repeated in the financial media. Plus, most investors don't have the time to sit down and read through a 20-page report.

The problem is that ratings scales are not uniform across Wall Street. At one brokerage "buy" may be the strongest recommendation, while at another, "buy" could be second to a "strong buy" rating. The second-highest ratings also have a number of different other names: "accumulate", "outperform", "moderate buy" or "overweight". A similar mix of terms appears further down the scale as the ratings become more negative. Finally, some brokerages use a number system to indicate their rating on a stock.

The chart below shows an approximation of where ratings fit in relation to each other: