--- title: What Is Downgrade Risk? description: In this article, we’ll discuss what downgrade risk is. image: https://www.realized1031.com/hubfs/risk-1204460571.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # What Is Downgrade Risk? Posted Jun 20, 2022 ![risk-1204460571](https://www.realized1031.com/hs-fs/hubfs/risk-1204460571.jpg?width=750&height=392&name=risk-1204460571.jpg) Downgrade risk affects both bond and equity investors. Different entities issue ratings for bonds and stocks. But the net effect of a downgrade is similar for both bonds and stocks. Investors who hold either of these investments are always exposed to downgrade risk. In this article, we’ll discuss what downgrade risk is.  ### Rating Agencies and Analysts Where does downgrade risk come from? Bonds and equities are graded by rating agencies and stock analysts, respectively. Rating agencies focus on [corporate](https://www.realized1031.com/glossary/corporate-bond) and government bond quality. Equity analysts focus on the quality of stocks.  Each provides proprietary ratings. Ratings on bonds for a company can be different depending on the rating agency. It’s the same for stocks. There’s often a broad range of analyst ratings for a single stock. One analyst may have an underperform rating on a stock while another has an outperform. Ratings on bonds and stocks can change for many reasons: - Economic downturn - Over-reliance on continued debt financing - Slow down in growth - Overall sector downgrade In some cases, before a company’s bonds are downgraded, a rating agency will issue a ratings watch. This basically puts the company on probation and warns investors of heightened risk. Some bonds are considered investment grade, while others are called junk. These terms depend on the specific scoring systems proprietary to each rating agency. *Investment grade* isn’t a subjective term. It has legal merit. Fiduciary institutions, such as banks, are required by law to limit their bond investments to only investment grade. ### How Do Downgrades Affect Bonds and Equities? Downgrades have a negative impact on both bonds and equities. It signals to the investors that the entity behind the bond or stock has weakened in some material way. When a bond is downgraded, the company will have difficulty trying to issue new debt. To get around this problem, the company must raise its interest rate. Increasing the interest on new bonds helps offset some of the additional risks investors face. A higher interest rate may bring in new investors, but it also increases the cost of capital. The company must pay more for debt financing. This can decrease overall margins and require cutbacks in operating expenses, staff layoffs, or termination of a new project. The trickle effects of higher debt costs can be devastating for some companies. What does a bond downgrade mean for an investor who is holding a bond during the downgrade? The downgrade means the investor is now holding a riskier investment. The value of the bond will also go down as interest rates have now increased. When a stock analyst downgrades a stock, the immediate impact can be a drop in the stock price. Obviously, that will affect an investor’s portfolio’s value. The downgrade can also cause some larger institutional investors to sell their holdings, causing the stock to decline further. If that isn’t enough, institutional investors that may have been considering the stock will probably take it off of their watchlist. It can be difficult to know when a rating agency will downgrade a bond or when an analyst will downgrade a stock. How can investors protect themselves from downgrade risk? One method is [diversification](https://www.realized1031.com/glossary/diversification), which can lessen the negative impact of a single investment. There are many ways to diversify a portfolio, but all of them have the same objective — to limit the impact of volatility on a portfolio. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Investing involves risk, including possible loss of principal. A bond's yield, share price and total return change daily and are based on changes in interest rates, market conditions, economic and political news, and the quality and maturity of its investments. In general, bond prices fall when interest rates rise and vice versa. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.   Discover Ways To Help Manage Risk In Your Investment Portfolio [![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-250.png?width=250&height=250&name=IPWM-Risk-ebook-250.png "Learn more about how to ...") ](https://www.realized1031.com/blog/what-is-downgrade-risk#blogform) Download eBook ---   --- ### Discover Ways To Help Manage Risk In Your Investment Portfolio ![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-550.jpg?width=550&height=650&name=IPWM-Risk-ebook-550.jpg) Learn more about how to incorporate real estate investments into your risk management strategy By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Downgrade risk affects both bond and equity investors. Different entities issue ratings for bonds and stocks. But the net effect of a downgrade is similar for both bonds and stocks. Investors who hold either of these investments are always exposed to downgrade risk. In this article, we’ll discuss what downgrade risk is. Rating Agencies and Analysts Where does downgrade risk come from? Bonds and equities are graded by rating agencies and stock analysts, respectively. Rating agencies focus on corporate and government bond quality. Equity analysts focus on the quality of stocks. Each provides proprietary ratings. Ratings on bonds for a company can be different depending on the rating agency. It’s the same for stocks. There’s often a broad range of analyst ratings for a single stock. One analyst may have an underperform rating on a stock while another has an outperform. Ratings on bonds and stocks can change for many reasons: Economic downturn Over-reliance on continued debt financing Slow down in growth Overall sector downgrade In some cases, before a company’s bonds are downgraded, a rating agency will issue a ratings watch. This basically puts the company on probation and warns investors of heightened risk. Some bonds are considered investment grade, while others are called junk. These terms depend on the specific scoring systems proprietary to each rating agency. Investment grade isn’t a subjective term. It has legal merit. Fiduciary institutions, such as banks, are required by law to limit their bond investments to only investment grade. How Do Downgrades Affect Bonds and Equities? Downgrades have a negative impact on both bonds and equities. It signals to the investors that the entity behind the bond or stock has weakened in some material way. When a bond is downgraded, the company will have difficulty trying to issue new debt. To get around this problem, the company must raise its interest rate. Increasing the interest on new bonds helps offset some of the additional risks investors face. A higher interest rate may bring in new investors, but it also increases the cost of capital. The company must pay more for debt financing. This can decrease overall margins and require cutbacks in operating expenses, staff layoffs, or termination of a new project. The trickle effects of higher debt costs can be devastating for some companies. What does a bond downgrade mean for an investor who is holding a bond during the downgrade? The downgrade means the investor is now holding a riskier investment. The value of the bond will also go down as interest rates have now increased. When a stock analyst downgrades a stock, the immediate impact can be a drop in the stock price. Obviously, that will affect an investor’s portfolio’s value. The downgrade can also cause some larger institutional investors to sell their holdings, causing the stock to decline further. If that isn’t enough, institutional investors that may have been considering the stock will probably take it off of their watchlist. It can be difficult to know when a rating agency will downgrade a bond or when an analyst will downgrade a stock. How can investors protect themselves from downgrade risk? One method is diversification, which can lessen the negative impact of a single investment. There are many ways to diversify a portfolio, but all of them have the same objective — to limit the impact of volatility on a portfolio. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Investing involves risk, including possible loss of principal. A bond's yield, share price and total return change daily and are based on changes in interest rates, market conditions, economic and political news, and the quality and maturity of its investments. In general, bond prices fall when interest rates rise and vice versa. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.", "articleSection" : [ "Risk" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-07-14T15:51:29+0000", "datePublished" : "2022-07-14T15:51:29+0000", "description" : "In this article, we’ll discuss what downgrade risk is. \n", "headline" : "What Is Downgrade Risk?", "image" : { "@type" : "ImageObject", "height" : 392, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/risk-1204460571.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/what-is-downgrade-risk", "name" : "What Is Downgrade Risk?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/risk-1204460571.jpg" } ```