Grades are used to describe the condition of both coins and medals. They are a numeric value, usually ranging from 1 to 70, with 1 describing a coin that is badly worn and barely identifiable to 70, which describes a superbly struck specimen that is in the upper 1% of all coins produced by the mint that year.
Grades are important to determining value. While there may be millions of a coin out there, there are often very few preserved in the highest grades. For example, there is only 1 1974 Barbados 5c recognized in MS68 by NGC, and 1 in MS69 while there were 44,708 produced.
This example also illustrates 2 pitfalls of scarcity – many high grade coins are not slabbed, so the true population may be unknown. Also, each of the third party grading services has a separate inventory system, and the system does not account for the same coin possibly being graded multiple times or counted on the lists of two different companies (as collectors often resubmit coins in an attempt to get a higher grade).
The difference in grades can work out to a significant difference in value. For example, an 1869-S dime in Good-4 condition may be found in a silver melt bin for slightly above melt value. But, slabbed Mint State-63 1869-S dimes have traded hands for more than $1000.
The most widely used scale (today) is the Sheldon scale. It was developed by Dr. William Sheldon in 1949 but has been modified since then. As I write this, the modified Sheldon scale is used by all of the major third party grading services when assigning a grade to a coin. It can be applied to medals and foreign coins, but many foreign coin collectors use a simplified version with fewer steps between grades. British collectors in particular seem to use a much harsher grading system, and will typically assign a full step lower grade to the same coin.
The adjectival grading system was the predecessor to today’s 70-point grading scale, and the adjectival terms are still used to help clarify the numeric equivalent.
When coins are worn unevenly on the front and back, a split grade may be assigned. For example, many coins that were stored in 19th century storage cabinets had heavy wear on one side (where the coin rested against a felt lined shelf and suffered rubbing every time the shelf was moved). These coins might have a EF40/VF30 grade. It is rare to see a significant difference between split grades unless one side of the coin was deliberately defaced.
Poor-1 or P-1 (Poor) – The type is barely recognizable, but little else due to the coin being badly damaged, corroded, or worn smooth.
Fair-2 or FR-2 (Fair) – Type and date are barely discernable, but otherwise the coin is damaged or extremely worn.
AG-3 (About Good) – Type and date are discernable, although some spots may be worn out. Some lettering should be apparent, if not necessarily readable.
G-4 (Good) – Major devices and features are evident as outlines. although the coin overall is heavily worn.
G-6 (Good-plus) – Coin has a full rim plus major devices and features are clearly outlined. Heavy wear.
VG-8 (Very Good) – Full rim with clearly discernable devices and features. Most legends are readable clearly, but the whole coin is still significantly worn.
F-12 (Fine) – Distinct rim, all legends readable, clear devices showing some detail, but the whole coin is moderately worn. The wear should be even, or the coin belongs at a lower grade.
VF-20 (Very Fine) – Clearly readable but lightly worn legends, devices show good detail, rims are clean, but the whole coin shows moderate wear on the high points and a little wear below.
VF-30 (Good Very Fine) – Legends are clear, devices show all detail with little wear; high points are lightly worn.
EF-40 (Extremely Fine) – Legends are sharp, devices are clear with slight but obvious wear on the high points.
XF-45 (Choice Extremely Fine) – Legends and devices are clear and sharp, with slight wear on the high points, and great eye appeal.
AU-50 (About Uncirculated) – Sharp legends and devices show only a trace of wear on the highest points. There must be some remaining mint luster.
AU-55 (Good About Uncirculated) – Sharp legends and devices show only a hint of wear on the high points. Remaining mint luster must be at least half; great eye appeal.
AU-58 (Choice About Uncirculated) – Virtually uncirculated, except for minor wear marks on high points. Nearly all mint luster must be present, and must have outstanding eye appeal.
MS-60 (Mint State Basal) – Coins in this grade are ugly, dinged-up, bag-marked, ill-toned specimens, but they are in mint condition and free of any wear!
The grades from MS-60 to MS-70, as well as the Proof designations, are all based primarily on eye appeal, quality of luster and/or toning, and the presence or absence of contact marks, hairlines, etc. All coins MS-60 and higher are Mint State coins.
It is worth noting that Proof is not a grade, but a type of coin. Many proof coins are in PF-60 or higher condition, but some proof coins did end up in circulation. They can be hard to recognize as proofs in lower grades, but can often be identified due to mint mark. For example, a 1968-S dime was only produced for proof sets, and any found in EF40 condition would have likely been circulated. It would be equally accurate to grade as PF-40 or EF-40.