Overweight vs. Underweight Stock

Stock market analysts and investment advisers use the terms "overweight" and "underweight" as shorthand for the investment return potential of various stocks. The two terms are often used as alternatives to buy and sell signals issued by Wall Street analysts. Individual investors will see the most stock price action when an analyst changes the rating on a particular stock.

Wall Street Stock Analysis Business

Investment and other financial companies employ analysts who research and provide reports on the investment potential of a large portion of the stocks that trade on the U.S. stock exchanges. An analyst will cover a number of stocks and be the expert in her firm on each of the stocks she covers. Individual stock ratings provide a basis to determine whether a stock is a good investment prospect. To help the firm's client base, a stock is rated for investment potential compared with competitor companies and the overall market.

Different Terms for Buy, Sell or Hold

An analyst will maintain and update a specific investment rating on a stock. The most commonly terms for ratings are a recommendation of either buy, sell or hold. A "buy" rating means the analyst recommends buying or adding to a position. "Hold" indicates the stock can remain in a portfolio, but buying more is not recommended. "Sell" is self-explanatory. Instead of "buy," "hold" and "sell," some investment firms use the terms "overweight," "equal weight" and "underweight" to provide the same type of recommendations concerning a stock.

Analysts Deep Dive into Company Businesses

The analyst following a particular stock will become intimately familiar with the company's business and competitors. An analyst will develop models for sales and expenses to determine future expected profits and a projected share price. Changes in a company's business outlook could lead an analyst to publish a ratings change. When an analyst upgrades or downgrades his outlook for a stock, he usually includes what has changed in the forecast of the company's business results.

Rating Changes Affect Share Prices

The greatest effect of ratings on share prices occurs when an analyst changes his rating on a stock. If the rating changes from overweight to equal weight, or equal weight to underweight, the market will view the change as a downgrade of the stock, and it is likely that investors will sell and drive down the share price. Upgrades would be from underweight to equal weight, or equal weight to overweight. This type or rating change can push the share price higher.