What Does Outperform Mean in the Stock Market?

Outperform is a term that professionals use a lot in the stock market. Yet many people still do not fully understand what it means. 

What does outperform mean in the stock market?

Outperform is a term analysts use widely in their analysis and research when issuing assessments and investment recommendations to investors in the stock market.

Many professionals also use the term to say that one investment’s return beats that of other investments. Put simply, among different investments, the one that delivers the better result is said to outperform the others.

For example, outperform is most commonly used when comparing an investment with the overall market. Securities analysts usually compare an investment’s return with a benchmark index, such as the VN-Index or VN30. So the term outperform is used when an investment does better than the market benchmark.

Why does outperformance matter?

An index basket includes many securities from companies in the same industry or of similar market capitalization. Anything that helps a company generate higher revenue and profit than its industry peers will make its share price rise faster. There are also many other reasons a share price may rise, such as good corporate governance or popular products. So, compared with the benchmark, a company that outperforms the overall market or other stocks in its sector will attract more investment opportunities, and demand for its shares in the market will also rise.

Why does outperformance matter?

Example: an investment fund uses the VN-Index as its benchmark, and the manager of that portfolio, after analysing stocks of similar market capitalization, identifies 10 stocks expected to generate higher earnings per share than the VN-Index average. Based on that analysis, the fund increases its weighting in these 10 stocks, which have better prospects than the index basket.

Once investors clearly understand the term outperform, they can draw on a wealth of assessments from securities analysts. This helps them make sound, effective investment decisions and achieve the best possible returns.

One common way to select and screen stocks that outperform the overall market is to use relative strength (RS). Find out more here.

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