What Is Market Overhang?

Market overhang has multiple contexts within finance. Two of the common uses of the term involve customers or investors waiting for future events before they buy.

Key Takeaways

  • Market overhang refers to customers of investors waiting for future events before they buy a certain product or stock.
  • Within a business context, market overhang refers to a customer waiting for a product announced by a leader in another space instead of buying available products, thereby 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 mostly held back due to fear of a decline in the stock's value.

Understanding Market Overhang

In a business context, overhanging the market or a market overhang, happens when a leader in a product space announces they will begin producing a product in a new industry. Since the company is already a respected competitor in its first industry, the announcement that it will enter a new industry causes people to wait for the new product to hit the market instead of buying already available products. This waiting period can create a backlog of demand.

Overhanging the market is at times an intentional move by companies. The act of 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 finally 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 as a combined result of sales and a strong wish to sell among those who still hold a certain stock but fear that selling it may cause further declines. Depending on the overall liquidity in the stock, 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 they wish to sell and are aware of high selling interest across the market for the stock. Another scenario arises when a large shareholder is thought to be looking at selling their stake. This creates an overhang in the stock, which prevents investors from selling the stock until the large shareholder is done selling his stake. 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 recently acquired shares.

Market overhang usually relates to trading in one security but can also apply to larger areas of the market, such as an entire sector.

Examples of Market Overhang

Tech behemoth Apple has perfected the art of creating a market overhang for its products in new and existing industries. For example, it had been teasing an entry into smartwatch product category since 2013. In interviews, Apple CEO Tim Cook pointed to his wrist and said the company thought that it was an interesting place for a product.

While there were other competitors, such as Fitbit and Pebble, already in the market, Apple enthusiasts waited with bated breath for their favorite company's entry. Finally, as news reports about its foray into wearables piled up, the Cupertino company announced the first Apple Watch in 2014. Not surprisingly, it ended up with an estimated two-thirds share of the overall market for wearables 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, then the company's stock price would decline further.