DEFINITION of 'Clowngrade'

An upgrade or downgrade of a security for reasons considered to be poor. For example, when a sell-side analyst provides an opinion on a stock for reasons other than the health and profitability of the company, or overstates or overreacts to a company's financial data or performance, it's a clowngrade.

BREAKING DOWN 'Clowngrade'

The speed at which information can spread has increased rapidly in the age of computers, the Internet and social media. Historically, investment opinions were provided by analysts employed by financial institutions or companies that were linked to Wall Street. The extent to which these opinions were disseminated depended on how they were provided – newspaper, radio, television – and the popularity and reliability of the person giving the opinion. This system was upended with the advent of the media democratization, in which anyone interested in a particular topic can share his or her opinion to a wide audience instantaneously.

Clowngrades may occur for a variety of reasons. For example, an analyst providing commentary on a television show may feel pressured to provide a sound bite that would draw attention to the network. This sound bite may involve an upgrade or downgrade of a stock. In some cases, individuals may weigh in on the potential growth of a stock without a clear understanding of the mechanics of the issuing company. For example, an analyst may issue a downgrade for a technology company based on the profit margin of one of the company’s products. While the profit margin may be an important driver in a company’s growth, it may not warrant a downgrade of the entire organization.

The underlying motives for an upgrade or downgrade can also be unethical. For example, someone with a personal interest in the decline of a share, such as someone who has sold the share short, will profit from investors driving down prices in the overall market. In this case, a clowngrade would occur if the individual issues a downgrade specifically to drive down prices and increase his or her profit, regardless of the health of the underlying company. (For related reading, see: Buy Side vs. Sell Side Analysts.)