Updated on March 13, 2023
An Overbought stock is one that is traded at a considerably higher value than its ‘considered’ or calculated fair value. An overbought stock is considered overpriced in the stock market. This overvaluation can be caused by market sentiment, exuberance in stock markets or when there is positive news about a company or its future growth. In such times, many ‘favorite’ or ‘hot’ & ‘trending’ stocks are bought aggressively in higher than usual volumes. For sellers, it becomes a profitable opportunity.
What happens when a stock is overbought?
A market can be overbought for a short term or last a little longer and then correction brings it down. The prices fall either drastically or get back to their ‘fair’ or intrinsic value. Investors compare market price and assess actual price of securities to spot over valuation. Traders make use of certain technical oscillators like Relative Strength Index (RSI) and stochastic oscillators for buying and selling decisions. RSI of over 70 is considered as an indication of an ‘overbought’ market.