Have you ever heard a business analyst refer to ‘overweight stocks’? When you hear this term for the first time it may confuse you a bit so let us know more about it today.
By the end of this article, you would be able to know what exactly does an overweight stock mean and what does it represent in the world of stocks?
When it comes to overweight and underweight stocks, we also refer to it as buying and selling. When an analyst rates a stock as overweight, it means that the stock is going to perform well in the future. Furthermore, underweight refers to the poor performance that just a stock may provide in the future. Let us understand the rating system to understand it properly.
Rating System: Three-Tier and Five Tier
Stock analysts do in-depth research and make recommendations on various issues in investee companies. They give a special rating. You must have heard about the three-tier rating system of Overweight, Underweight and Hold.
You may get confused as not every company may use the same term. Some companies use a 3-tier system instead of five. Sometimes they do not use words like overweight and underweight. They refer to overweight as “add”, “accumulate”, or “outperform”.
Overweighting analysts also means that the stock will outperform and outperform the defined benchmark based on market conditions. Hence, they point it as a thumbs up to buy the stock.
Underweight is also known as “underperform”, “week-hold” or “low”. As every company addresses it with different names.
It will be easier for you if you know the list of names by which they are known.
Hold and buy terms are used in the five-tier rating system. With the help of a Buy rating, we understand that the stock needs more advertisement.
Three-tier ratings are used separately as “equal weight”, “overweight” and “underweight”. This indicates that it is not properly explained whether to buy or sell. However, in this possibility, you can buy shares.
Why is it addressed with an underweight or overweight stock?
You must have come across the term overweight while designing your investment portfolio. Your portfolio should maintain a balance, that is, it should be a mix of different stocks.
It should not imply that you have invested in only one stock. This indicates an out-of-balance and thus your portfolio is overweight. And if you invest less than a particular category then it is shown as underweight.
Stock market indices depend heavily on market capitalization. Each stock in the index is given a specific weightage. Therefore, if an analyst describes a stock as overweight they are merely indicating that the index is overweight.
How can I find overweight stocks?
Along with your broker, you can take advice from many brokers. They must have a select few stocks that will outperform the market. Apart from this, you can find such overweight stocks by doing research and try to avoid underweight stocks.
What does an outperforming stock represent?
Overnight and outperforming stocks mean the same thing. It is recommended to buy the best-performing stocks. It is known to outperform the market.
We all want good returns when we invest in a particular stock. It is essential to understand the importance of investing in well-performing stocks to avoid any losses. Above we have explained what is meant by overweight stock and what to do when a stock is overweight. Stay in touch to know more about interesting facts about stocks.