What is overweight rating stock

In other words, an overweight rating on a stock means that the stock deserves a higher weighting than the benchmark's current weighting for that stock.

For example, let's say that Apple Inc. A stock that has an underweight rating means that an equity analyst believes the company's stock price will not perform as well as the benchmark index being used for comparison. In other words, an underweight stock rating means it will generate a below-average return compared to the benchmark.

As a result, the stock deserves a lower weighting than the benchmark's current weighting for that stock. A stock that has an equal weight rating means that an equity analyst believes the company's stock price will perform in line or similarly than the benchmark index being used for comparison. Although an overweight rating technically means the stock should have a higher weighting in the underlying benchmark, it usually is interpreted by market participants that the company is doing well, and its stock price should move higher.

In other words, investors view an overweight rating as an indicator that the stock price should perform better than the performance of the overall index that's being used as the baseline for comparison. If an analyst believes that a stock price should appreciate, the analyst will likely indicate the time frame and an expected price target within that time frame.

A criticism of overweight ratings is that equity analysts do not provide specific guidance as to how much of the stock should be purchased by investors. One investor might interpret an overweight rating as an indicator to buy 1, shares of the stock while another investor might interpret the rating differently and buy only 10 shares of the stock. Also, the current position size of the stock that comprises an investor's portfolio plays a critical role in determining how many additional shares to purchase based on the new rating.

If a stock currently has a large position within a portfolio and an investor buys more shares based on the overweight rating, the portfolio might not be diversified. In other words, the portfolio might be out of balance whereby too much of the investor's investment capital is tied up in one company. If the analyst turns out to be wrong, and the stock price goes down, the investor stands to lose more money because there's an overexposure to one stock.

The overweight rating provides a little guidance as to how specifically investors should go about purchasing the shares as it relates to their investment portfolio. Perhaps a portfolio that is heavy with technology stocks shouldn't purchase an additional technology stock based on an overweight rating since the portfolio could become out of balance. It's important to consider that an overweight rating by some equity analysts might be a short-term trade.

Investors should investigate how an analyst conducts their recommendations, determine what they're using as a benchmark, and whether they're long-term or short-term investors. The investment time horizon, including the investor's age, will likely determine how long a stock might be held in a portfolio. For example, a retiree might hold a stock for only a few months or years because it may need to be converted to cash at some point.

A millennial, on the other hand, will have a much longer outlook or time horizon for holding that stock. The analyst's rating needs to be taken into context with the investor's time horizon, risk tolerance, and whether the money will be needed at some point in the future.

Analysts may give a stock an overweight rating due to positive earnings and raised guidance. For example, assume company DEF, a technology company, releases its quarterly earnings results and beats its earnings per share and revenue estimates. Trading Basic Education. This often comes in the form of a rating. Not every firm uses the same terms. Some use systems with five tiers instead of three. There are no rules dictating how companies issue ratings, so it helps to become familiar with each company's system.

But it can be even more confusing. In most cases, your portfolio should be made up of a diverse mix of stocks and other investments. You should try to avoid being too heavily invested in any one thing. When your portfolio is unbalanced, it may mean that you are too heavily invested in one thing.

So, what does this have to do with analyst ratings? So, for instance, in May , Apple had a weighting of 5. But none of this is very useful for the average person. Ratings are simply one piece that goes along with past price performance, earnings reports, profit margin, and other information. No one should ever buy or sell a stock based on what one single person thinks.

And this is especially true because analysts often disagree. In this sense, it is a buy recommendation. When an analyst suggests underweighting an asset, they are saying it looks less attractive for now than other investment options.

Portfolio managers seek to create a balanced portfolio for each investor and personalize it for that individual's risk tolerance. A portfolio can be overweight in a sector, such as energy, or in a specific country. It may be overweight in a category, such as aggressive growth stocks or high-dividend-yielding stocks. In this context, the term overweight usually implies that the portfolio is being compared to a predefined standard or a benchmark index. Actively managed funds or portfolios will take an overweight position in particular securities if doing so helps them to achieve greater returns.

Another reason for overweighting a portfolio holding is to hedge or reduce the risk from another overweight position. Hedging involves taking an offsetting or opposite position to the related security. The most common method of hedging is through the derivative market. The danger of overweighting one investment is that it can reduce the overall diversification of their portfolio. A reduction in diversification can expose the holding to additional market risk.

When research or investment analysts designate a stock overweight, it reflects an opinion that the security will outperform its industry, its sector, or the entire market. An analyst's rating of overweight for a retail stock would suggest that the stock will perform above the average return of the retail industry overall over the next eight to 12 months.

The alternative weighting recommendations are equal weight or underweight. Equal weight implies that the security is expected to perform in line with the index, while underweight implies that the security is expected to lag the index in question. Portfolio Management. Mutual Fund Essentials. Dividend Stocks. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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