What Is Oversold Stock?
Oversold and over bought are stock market jargon indicating stock prices have moved too far in one direction. Oversold is used if market commentators or investors believe share prices have declined too far. An oversold condition for a stock may be a buying opportunity for a quick profit.
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Stock Prices
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The current share price of a stock is determined by the number of investors on either side who want to buy the stock and want to sell the stock. If there are more who want to buy, the share price will rise until enough sellers come in to sell their shares. If there are more sellers than buyers, the share price will decline to the point it becomes attractive to a larger number of buyers. This back and forth between buyers and sellers is a continuous process through electronic stock exchange systems and usually results in a stock price moving in small steps over time.
Selling Pressure
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If there is a large number of sellers for a stock and few buyers, the share price can decline significantly before the price stabilizes. A quickly falling stock price can discourage potential buyers, allowing the stock price to decline even further than it would in a more orderly market. If the share price falls to a point where the share value is below a fair market value for the shares, the stock can be described as oversold.
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Technical Indicators
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Stock market analysts, traders and investors use technical indicators to put a value on how much a stock or the overall market is oversold. Technical indicators used with price charting software classified as oscillators will show oversold or overbought prices. Commonly used oscillator indicators are relative strength index -- RSI -- and the Stochastic Oscillator. Another way to measure how much a stock is oversold is by computing the number of statistical standard deviations the stock is below an average price, such as the commonly used 50-day moving average.
Oversold Psychology
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The primary reason behind a stock or the market reaching oversold price levels is market psychology. A falling price makes investors fearful, causing them to dump their shares, pushing prices even lower. Even though technical indicators are indicating an oversold price, share prices can continue to fall. Traders attempting to profit from the rebound from an oversold share price must be patient and understand the price could fall even further before turning upwards.
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