How to Read A Morningstar Rating

Figuring out whether a stock or fund is worth the investment can be a time-consuming, analytical process. Learning to how to read and understand Morningstar ratings, however, can make this task much easier. Since 1985, Morningstar has been rating stocks and funds to help investors make informed decisions about their investments. Many financial Web sites use Morningstar ratings when stock reports are given, but you can always find the rating for a stock or fund by visiting the Morningstar Web site.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Computer with Internet access
• Stock or fund names
• Morningstar ratings

Read a Morningstar Rating for Funds

1. Locate the Morningstar rating for your fund. If you're having trouble finding it, the best place to look is on the Morningstar Web site (see Resources below).

2. Learn how Morningstar ratings are reported. Funds are rated on a scale of 1 to 5 and are based on the fund's performance in relation to similar funds. To get the final data point, Morningstar adjusts for risks and sales charges.

3. Determine whether your fund has multiple ratings. It is not uncommon for funds to have ratings for up to 3 time periods (3, 5, and 10 years), which are then combined to produce an overall rating.

Read a Morningstar Rating for Stocks

4. Search the Morningstar Web site for the stock. If you already know the stock's ticker number, you can enter it in the search box. Alternatively, you can also search for a stock by company name.

5. Find and examine the rating for your stock, which is based on a combination of the stock's current market value and what Morningstar feels is a fair market value. Ratings for stocks are adjusted for risk.

6. Compare the Morningstar ratings for several stocks to determine which would best fit your investment needs and goals.

7. Consider the level of risk you're willing to take with your investments. Stocks with 5-star ratings are expected to offer investors a better return than stocks with 1-star ratings.

Tips & Warnings

• Keep in mind that funds that are 3 years old or less are not given a Morningstar rating.
• Fund ratings are entirely objective. They are based on mathematical computations of past performance.
• Note that Morningstar ratings are expressed as stars, not numbers.
• A Morningstar rating is a good indicator of whether a fund merits further investigation. However, it should not be used as a signal to buy or sell.