Definition of Oversold

What does the term "oversold" mean? What is the definition of the term "oversold"?

When it comes to the stock market, each stock has a perceived "value".

If you believe that a stock is undervalued, then you would want to buy.

If you believe that a stock is overvalued, then you would want to sell.

Now, the "value" of a stock is entirely subjective. One investor may find that a stock is overvalued, while another may think that it is undervalued.

Now, to the term "oversold". Let's assume that you think that a stock is "worth" $20 per share. A massive wave of selling in the stock takes place due to some poor earnings results. The stock, which was once trading at $45, plummets to just $10. It seems like everyone is exiting the stock at the same time.

You decide that the stock is now "oversold" - this would mean that the selling pressure has taken the stock below the price that you think the stock is worth. If you think that the stock is worth $20, and it is now trading at $10, then you would be of the opinion that the stock is now oversold.

Of course, it is extremely important to constantly re-evaluate the "worth" of a company. For instance, if a company reports worse-than-expected earnings, then this should cause you to re-evaluate the company to determine if it is still worth what you thought it was originally worth. Many investors get crushed due to the fact that they are unable to objectively evaluate the stocks that they own on a regular basis.

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