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What is Market Overhang?

Market overhang refers to a decline in a stock's price driven by expectations that the price will experience further declines.

How Does Market Overhang Work?

Market overhang is a phenomenon whereby investors put off buying shares of a particular stock based on a widely held belief that the stock's price will continue to decline. In other words, investors are hesitant to purchase shares, because the stock price itself exhibits a sustained downward trend. A market overhang generally ends when a stock starts showing price stability at a lower level.

Market overhang can affect the price of a stock or even of a whole sector for anywhere from a week to several months. The term 'overhang' is a reference to an awning or shelter that people might gather beneath until a storm recedes.

Why Does Market Overhang Matter?

The expected price declines surrounding a market overhang can be based on reports of an upcoming large-scale sale of shares by a major shareholder or institutional investor. In addition, an initial public offering (IPO) can result in a market overhang if the shares fail to perform as expected and the largest shareholders of the company are expected to sell their holdings en mass.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.