Within the stock market, the term overweight can refer to two different contexts.
1) Overweight as part of a three-tiered rating system, along with “underweight” and “equal weight”, is used by financial analysts to indicate a particular stock’s attractiveness. If a stock is recommended to be “overweight”, the analyst opines that the stock is better value for money than others.
2) An investment portfolio judged to be overweight indicates that an investor holds proportionately more than the benchmark weight of a certain asset (a share, bond, industry/sector, country, currency, or asset class, etc.).
Definition 1: If a particular stock is selling for $500 and the analyst feels that the stock is worth $600, the analyst would be declaring the stock to be overweight.
Definition 2: Suppose that Technology stocks make up 10% of the relevant stock index by market value. For example, the weight of the Technology sector in the index could be 10%.
Overweight — Suppose that an investor holds 15% of his/her investment in Technology stocks. The investor’s stock portfolio is then 5% overweight in Technology stocks.
Suppose further that the investor is advised by his broker or financial adviser that Technology should be “overweight”. The investor is being advised to hold more investments in Technology, as a percentage, than the weight of that asset in the index/market. In this example, the recommendation is to hold more than 10% by value of Technology shares.
Underweight — In contrast to overweight holding, if the broker advises that Technology should be “underweight”, the recommendation to the investor is to hold less than 10% by value of Technology shares.
Equal weight – The third possibility is that the broker advises that Technology should be “equal weight”. In which case, the recommendation is to hold 10% by value of Technology shares.
- ^“Definition of Overweight”. Investopedia. Retrieved 4 January 2013.
- ^Updegrave, Walter (2003-08-19). “Glossary please! What do terms like “overweight” and “underweight” mean, anyway?”. CNNMoney.com, Ask the Expert. Retrieved 2007-01-03.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.