Overstocking is to help dispurse aggression among African cichlids like lake malawi fishes. But your tank isn't really suited for africans imo. Neither is it suited for angelfish or keyholes due to the lack of length. you'll have to stick to dwarf cichlids like rams and apistos.
To answer one question, no, cichlids don't like being over stocked, and they're not okay with being over stocked. They will not be happy when over stocked.
People say you "over stock" african cichlids because you put a lot of fish in a big tank (your tank isn't big, sorry to say) that grow pretty large and have a pretty large bioload. This means you'll need more filtration and tons of decor. In comparison to say, a community tank of tetras and gouramis and cory catfish, yes, this is over stocking. But over stocking is all about not over doing the amount of fish you have relative to their needs. And you can still overdo the amount of cichlids you put in a tank, even if in relative to having tetras an gouramis and cory catfish it is an over stocked tank to have a bunch of malawis all over, you can still over do it, and have too many african cichlids.
None of the rules of having like 15 6 inch long fish in a 55 gallon tank will apply to new world cichlids. They are totally different in needs and personality to africans.
to answer your other question of how many cichlids you can have in your tank, you can have either 2 rams or 3 apistos (1 male 2 females). No keyholes or angels or anything as they get a bit too large for the length of your tank.