What is an Upgrade
An upgrade is a positive change in a security's rating. An upgrade is usually triggered by a steady improvement in the fundamentals and financials of the entity that has issued the security. Upgrades to the credit rating of corporate issuers of debt securities are issued by rating agencies, such as Standard & Poor's.
Upgrades to investment ratings for stocks and fixed-income securities are issued by equity and bond analysts respectively at brokerage houses. In the context of portfolio management, the term "upgrade" also refers to a strategy whereby the risk profile and quality of the portfolio are improved by including blue-chips in it while eliminating speculative stocks.
BREAKING DOWN Upgrade
For example, a rating agency may upgrade the credit rating of an issuer from AA+ to AAA. Such a move would have a positive effect on all outstanding bonds and other fixed-income instruments of the issuer.
Example of an Equity Upgrade
An example of an equity upgrade would be an analyst raising the investment rating for a particular stock (or sector) to "buy" from "hold." An upgrade of this nature would sometimes be accompanied by an upward revision in the analyst's target price for the stock.
For equity and debt securities, an upgrade generally leads to positive press. Behind the scenes, the biggest benefit to an upgrade is a lower cost of capital, for both debt and equity. A lower cost of capital translates into a lower discount rate, which leads to a higher valuation and firm valuation.
Similar to how an individual might be able to borrow at a cheaper interest rate after a credit score "upgrade," businesses can access the capital markets more often and at cheaper rates after a positive upgrade event.
Beyond an outright upgrade event, credit rating agencies and equity valuation shops both publish watchlist or similar lists indicating securities or companies prime for an upgrade (or downgrade). Investors and creditors alike keep a close eye on potential directional changes to a security or business prospect.