Updated on March 12, 2023
Oversold refers to a stock market situation where a stock is traded at a considerably lower value than its fair value. An oversold stock is considered underpriced in the stock market. This undervaluation can be caused by poor sentiment in stock markets or when there is negative news about a company or its future growth. In such times, many good stocks are sold aggressively in higher than usual volumes.
What happens when a stock is oversold?
For buyers, an oversold stock offers a good investment opportunity with reasonable or better valuations. A market can be oversold for a short period or last a little longer and then a strong momentum takes it up. The stock prices move up or there is a rally in the markets which takes prices to a considerable higher level. Investors compare market price and assess actual price of securities to spot under valuation and then make decisions. Traders use certain technical oscillators like Relative Strength Index (RSI) and stochastic oscillators for profiting from such situations. A Relative Strength Index below 30 is considered as an indication of an ‘oversold’ market.