DEFINITION of 'Overvalued'

A stock with a current price that is not justified by its earnings outlook or price/earnings (P/E) ratio and, therefore, is expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the stock's market price, or from a deterioration in a company's financial strength.

BREAKING DOWN 'Overvalued'

Potential investors do not want to overpay for a stock. A few factors they may look at is the price to earnings (P/E) ratio in comparison to the company's peers, and the price to earnings growth (PEG) ratio to determine if a stock is overvalued. There are other factors as well that investors look at.

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