Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Standard & Poor's (S&P)

What it is:

Standard & Poor's (S&P) is a financial services company and a division of The McGraw-Hill Companies, Inc. S&P does business in six main areas: credit ratings, indices, equity research, risk management, investment advisory services, and data services.

How it works (Example):

The history of S&P goes back to 1860, when Henry Varnum Poor's published History of Railroads and Canals in the United States -- an early iteration of stock analysis. In 1906, the Standard Statistics Bureau began providing information on American companies, and in 1916 it began to assign ratings to corporate and government bonds.  In 1941, the two companies merged, forming the Standard & Poor's Corporation, which was purchased by McGraw-Hill in 1966.

S&P is well known for the ratings it gives for the debt and structured-finance deals of corporations, states, institutions, and governments. But S&P is also knows for its famous S&P 500 Index, which is used around the world as the benchmark for American economic performance. The company maintains several other indices as well, including the S&P Global 1200, the S&P Europe 350, and S&P Global Equity Indices. In fact, S&P is the world's largest index provider.

S&P's equity research arm largely provides analysis and opinion on stocks. Its risk management arm offers tools and services that help financial managers assess and predict various types of financial risk, and the investment advisory arm offers advice to other companies on how they should allocate the assets in their portfolios. The data services arm publishes and streams a variety of financial information to the market.

Why it Matters:

The idea behind S&P and other companies like it is to provide not just information to investor (market indices, for example), but insight that can help them make better decisions (credit ratings, for example). The value comes not only from the information and insight itself, but from the notion that S&P is an independent entity that is not beholden to any particular issuer and thus has no incentive to offer anything other than an objective assessment of a particular investment's risk. 

Unfortunately, the notion of objective expert assessment was seriously damaged in the global financial meltdown of 2007-2008 when it was discovered that ratings agencies like S&P and its competitor, Moody's, gave AAA ratings to mortgage-backed securities (MBS) that eventually became worthless. S&P continues to repair the damage to its reputation as a ratings agency. 

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