Rating Stocks : A summary

We are always fascinated with rating things around us. Ratings give an overview that helps us in making critical decisions. In finance while dealing with stocks we use rating systems to help stakeholder’s in deciding their future actions. A Rating system may be three-tiered: "overweight", "equal weight" and "underweight", or five-tiered: "buy," "overweight," "hold," "underweight," and "sell".

On Suggestion Of Siddarth,Making language crispier 
The whole story below can be further summarized as:
Buy: You should Buy the stocks
Overweight : I will suggest you to Buy the stocks
Equal Weight : I cant suggest you anything actually
Underweight: It's not a good proposition, My advice will be to sell the stocks
Sell : You should sell the stocks

For details and better understanding, Read Further

The term underweight has been defined as a situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and under weighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark.
If a stock is deemed "underweight" the analyst is saying they consider that the investor should reduce their holding, so that it should "weigh" less. For example, if an investor has 10% of their stocks in Retail, 25% in Manufacturing, 50% in Hi-Tech, and 15% in Defence, and the broker says that Retail is "underweight", then they are implying that a smaller percentage of the stocks should be in Retail.

The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

The term overweight has been defined as a situation where a portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so will allow the portfolio to achieve excess returns.

Overweight is an over sophisticated method of saying 'buy'. It gets its roots from portfolio allocation theory, which theorizes that you can increase your return and decrease your risk by allocating your assets among various types of assets. Investment advisers have usurped the term to make themselves become sophisticated investment advisers in tune with the latest buzz words so to speak.
If a stock is recommended to be "overweight", the analyst opines that the stock is a better value for money than others. For example, an investor holds 15% of his/her investment in Technology stocks then, the investor's stock portfolio is 5% overweight in Technology stocks. Suppose further that the investor is advised by his broker or financial advisor that Technology should be "overweight" then, the investor is being advised to hold more investments in Technology, as a percentage, than the weight of that asset in the index/market. i.e., more than 10% by value of Technology shares in this example.

A type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.

The Rydex S&P Equal Weight Exchange Traded Fund, for example, provides the same exposure to the smallest companies in the S&P 500 as it does to corporate giants such as General Electric and Exxon.
Equal weighting differs from the weighting method more commonly-used by funds and portfolios in which stocks are weighted based on their market capitalizations. Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds and, as a result, they usually have higher trading costs.

Carrying forward the above example will mean in case of equal weight the broker advises that Technology should be "equal weight" in which case, the recommendation is to hold 10% by value of Technology shares.

Buy and sell are stronger word than overweight and underweight. Buy has an exact definitions varying by brokerage, but in general this rating is better than neutral but worse than strong buy. Same goes for sell whose exact definitions vary by brokerage, but this rating is generally worse than neutral, but better than strong sell.