Overhang refers to a situation in the stock market where a company has a large number of potential shares that could enter the market in the future, which may create downward pressure on its stock price. These shares are typically not yet available for trading but could be issued through employee stock options (ESOPs), convertible bonds, or pending share sales by major shareholders.

From an investorís perspective, a significant overhang can signal potential selling pressure. When insiders, private equity investors, or promoters are expected to offload their holdings after the lock-in period expires, the anticipation of increased supply can negatively affect market sentiment and valuation. This often results in limited short-term price appreciation, even if the companyís fundamentals remain strong.

Companies may also face an overhang from convertible securities or warrants that could be converted into equity shares. In such cases, the conversion dilutes existing shareholdersí ownership, impacting earnings per share (EPS) and overall market capitalization. For traders, identifying overhang risks helps in assessing potential volatility and timing market entries more effectively.

However, an overhang is not always a negative indicator. Once the selling pressure subsides or the expected share supply gets absorbed by the market, stock prices can stabilize or even rise, especially if the company continues to demonstrate growth potential and strong financial performance.

In summary, understanding overhang is crucial for investors evaluating a companyís stock outlook. It provides insights into future supply-demand dynamics and helps in managing expectations regarding short-term price movements and dilution risks. A careful assessment of insider holdings, upcoming unlock periods, and convertible instruments can help investors make informed, risk-aware decisions.