How are over valued stocks corrected ?

Answer 1

By people selling them to cash in on the profit. Excessive sales with constant demand produces a lower selling price until supply and demand are in equilibrium.

Answer 2

various models to explain this but basically the Return on investment isnt enough to compensate the investment.

You can use the CAPM model to understand or Demand-supply to discuss it also.

CAPM model suggests that any security that is not on the Security Market Line(SML) (its a model of the return of secuirty vs beta risk) is not at price equilibrium. Naturally the stock will creep towards its equilibrium, because people will tend to sell the stock.

Demand and Supply. remember in dealing with stocks we are operating in a secondary market, where the supply is fixed. therfore the price of stock is largely determined by demand. Except if theres a Bonus issue, or share splits etc.
Therefore if price of share is too high. The qty supplied of shares is higher than that is demanded at that given price, this will cause demand to contract and move to its new position of price equilibrium of that stock.

Its all a little difficult to explain without the use of graphs. Hopefully it has given you some terms and ideas that you can explore.

Do some research on "Capital Asset Pricing Model" (CAPM)
and look up functions of demand and supply and how it operates within the secondary market, where supply is fixed.

Answer 3

No stock is ever overvalued. The value is simply what the stock price is. Whatever a buyer is willing to pay for a stock is what that current value is. The term overvalued is a misnomer.

Answer 4

The price takes a 10-20% drop, usually in one day.

Answer 5

Clown is right on!
.