What does it mean when a stock is overweight? Should you buy overweight stock? What are the pros and cons? Find out the answers to these questions in this short guide.
What Is Overweight?
In a nutshell, overweight means that the stock has a favorable future performance. Analysts give this rating to stocks they believe will outperform others in the broader market. Therefore, the stock with this rating is worth buying.
Investors are bullish on a particular asset when the stock has an overweight rating. This means they expect it to outgrow its direct competitors within the next six to 12 months. It can also show continuous profitability.
More so, analysts must justify a stock’s overweight rating. Since their rating is highly influential in investor decisions, they should provide valid reasons for their evaluation.
The overweight system is a part of a three-tier system for rating stocks. The other two ratings are underweight and equal weight.
Now that we talked about what is an overweight stock rating, let’s discuss some of its benefits. Among others, it’s a good indicator of an investor’s next move. It simplifies the buy recommendation from analysts.
Rather than presenting information that overwhelms the user, overweight ratings make the evaluation straightforward.
More so, it’s a good thing that overweight ratings help you uncover market trends. It will help you to diversify your portfolio by choosing a trending industry.
Further, overweight ratings can also help make balanced investments. It can help investors hedge against other securities. Plus, it can offset other investments previously over-bought.
Lastly, overweight stock ratings are easy to find. Industry experts can provide these recommendations. In turn, investors can have the right resources for their trading decisions.
One of the shortcomings of overweight stock ratings is that they’re nothing but a rating. It does not provide investors with recommendations on how much they should invest in an overweight stock.
Some investors might see an overweight rating as a signal to buy ten shares of a specific stock. Meanwhile, others might interpret it as a recommendation to purchase 100 shares.
In addition, the position of the stock in a person’s portfolio can influence how many shares to buy. Hence, the more shares of an overweight stock the investor buys, the less diversified the portfolio will be. It also prevents the spreading of risks across assets.
It’s also worth noting that these are based on the opinions of the analyst rating an asset. You must understand other factors, such as profit margins and earning reports.
To make the most of overweight stock ratings, learn the justification beyond such. It will give you a better understanding of why you should invest in it.
Overweight vs. Underweight in Investing
The biggest difference is how analysts expect the stocks to perform.
An overweight rating shows a positive performance within the next 12 months. Hence, it’s a recommendation to buy the stock. It’s a result of the expectation that the asset will be profitable.
Two things can happen in stocks with overweight ratings. First, it can increase value. Second, it may not lose too much of its current value.
On the other hand, stocks with an underweight rating show an anticipated poor performance within the next 12 months. It can mean losing value or slow growth. You should not buy the stock or sell it before the value plummets.
More so, you can also view being underweight as an instruction. Analysts under-weigh the stock, so you should not put too much emphasis on the stock in your portfolio. It’s as against an overweight stock, which you should give more weight to your investment portfolio.