Market Overhang What it Means How it Works Example
Market Overhang: What it Means, How it Works, Example
What Is Market Overhang?
Market overhang has multiple contexts within finance. Two common uses involve customers or investors waiting for future events before they buy.
Key Takeaways
– Market overhang refers to customers or investors waiting for future events before buying a certain product or stock.
– Within a business context, market overhang refers to customers waiting for a product announced by a leader in another space instead of buying available products, creating a backlog of demand for the leader’s product.
– In finance, market overhang refers to a buildup of selling pressure for a stock among traders who have held back due to fear of a decline in its value.
Understanding Market Overhang
In a business context, overhanging the market occurs when a leader in a product space announces they will begin producing a product in a new industry. Since the company is already respected in its first industry, the announcement causes people to wait for the new product instead of buying available products. This waiting period can create a backlog of demand.
Overhanging the market is sometimes an intentional move by companies. Announcing a new product well in advance of its availability is meant to stall purchases of currently available products and create a backlog of demand that will increase purchases when the new product becomes available.
Market overhang can also describe the observational theory that in certain stocks at certain times, there is a buildup of selling pressure. This occurs due to sales and a strong desire to sell among those who still hold the stock but fear further declines. Depending on the overall liquidity, a market overhang can last for weeks, months, or longer.
Market overhang is most often felt and created by institutional investors, who may have a large block of shares to sell and are aware of high selling interest across the market for the stock. Another scenario occurs when a large shareholder is thought to be looking at selling their stake. This creates an overhang in the stock, preventing investors from selling until the large shareholder is done. Market overhang can also develop in a poorly performing initial public offering (IPO) when the lock-up period ends and insiders look to unload their shares.
Market overhang usually relates to trading in one security but can also apply to larger areas such as an entire sector.
Examples of Market Overhang
Tech behemoth Apple has perfected creating a market overhang for its products in new and existing industries. For example, it had been teasing an entry into the smartwatch product category since 2013. In interviews, Apple CEO Tim Cook pointed to his wrist and said the company thought it was an interesting place for a product.
While there were other competitors such as Fitbit and Pebble, Apple enthusiasts waited for their favorite company’s entry. Finally, as news reports about its foray into wearables piled up, Apple announced the first Apple Watch in 2014. Not surprisingly, it ended up with an estimated two-thirds share of the overall wearable market by the end of 2015.
An overhang is generally created when a hyped company or startup goes public. For example, rideshare company Uber fell below its opening price of $45 after its IPO. This created a market overhang for institutional investors who did not cash out during the event. If they were to sell their holdings, the company’s stock price would decline further.
An overhang is generally created when a hyped company or startup goes public. For example, rideshare company Uber fell below its opening price of $45 after its IPO. This created a market overhang for institutional investors who did not cash out during the event. If they were to sell their holdings, the company’s stock price would decline further.
