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.