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T-KIFE(21) Equity Algorithm Expert ~ Powered With - Open AI Codex & GPT-3
In financial markets, underweight is a term used when rating stock. A rating system may be three-tiered: "overweight," equal weight, and underweight, or five-tiered: buy, overweight, hold, underweight, and sell. Also used are outperform, neutral, underperform, and buy, accumulate, hold, reduce, and sell.
If a stock is deemed underweight, the analyst is saying they consider the investor should reduce their holding, so that it should "weigh" less.[1] For example, if an investor has 10% of their stocks in Retail, 25% in Manufacturing, 50% in Hi-Tech, and 15% in Defense, and the broker says that Retail is "underweight," then they are implying a smaller percentage of the stocks should be in Retail. The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Within the stock market, the term overweight can be used in two different contexts.[1]
1.) A rating of a stock by a financial analyst as better value for money than other stocks. The other possible ratings are "underweight" and "equal weight", to indicate a particular stock's attractiveness.[2]
2.) A judgement of an investment portfolio that it holds proportionately more than the benchmark weight of a certain asset (a share, bond, industry/sector, country, currency, or asset class, etc.).
Examples
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 stocks 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 stocks 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 stocks should be "equal weight." In which case, the recommendation is to hold 10% by value of Technology shares.
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