Overweight can be used in different contexts regarding stocks. A professional stock analyst may use overweight as part of her rating system to describe a particular stock. Also, an investor can use overweight to describe the proportion of a stock he holds in his portfolio. Overweight can mean different things in each situation. Always seek clarification from your broker or financial advisor when he uses this term to describe stocks.
Professional analysts rate stocks based on how they expect them to perform compared to stocks in the same industry or compared to the overall stock market. An analyst rates a stock overweight when he believes the stock will generate stronger returns than other stocks. An overweight rating is generally the top rating among others, such as underweight or equal-weight. An analyst thinks an underweight stock will perform worse than other stocks and thinks an equal-weight stock will perform about the same as other stocks.
Potential Mixed Messages
An overweight stock rating means different things among different brokerage firms. For example, one firm may expect an overweight stock to outperform other stocks within six months, while another firm expects an overweight stock to outperform within 18 months. Also, an overweight stock is not necessarily a good investment. For example, an analyst might give an overweight rating to a stock in a declining industry, which suggests the stock might perform better than others in its industry but still lose value.
Comparing Your Portfolio to a Benchmark
An investor may describe a type of stock as overweight if she holds a greater percentage of that stock in her portfolio than is present in a benchmark. A benchmark is another group of stocks used as a frame of reference, such as the S&P 500. For example, if 20 percent of your portfolio consists of financial stocks and only 15 percent of the S&P 500 consists of financial stocks, your portfolio is overweight in financial stocks.
Overweight in Asset Allocation
An investor can be overweight stocks in general if he holds a greater percentage of stocks than other types of investments in his portfolio. The mix of investment types, such as stocks and bonds, in a portfolio is called asset allocation. An investor allocates assets in his portfolio according to his risk and investment preferences. For example, if your portfolio consists of 70 percent stocks and 30 percent bonds, your portfolio is overweight stocks.
- MarketWatch: Guide to Analyst Recommendations
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- Own the World: How Smart Investors Create Global Portfolios; Aaron Anderson
- Buy and Hold Is Dead: How to Make Money and Control Risk in Any Market; Thomas H. Kee
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