What is the role of a "rating agency" in financial markets?

A rating agency plays a crucial role in the financial markets by evaluating the creditworthiness of issuers and their securities. This assessment is essential for investors and can significantly influence their investment decisions. By providing credit ratings, these agencies help investors gauge the risk associated with debt instruments, such as bonds. A higher credit rating typically indicates lower risk, making the securities more attractive to investors, which can lead to lower capital costs for issuers. Consequently, the ratings provided by these agencies not only aid individual and institutional investors in making informed choices but also contribute to overall market transparency and stability.