A:

"Hammering" is a situation where large sale orders are placed against a particular stock because investors believe that the price of the stock is about to go down. Some reasons that might lead investors to believe that a stock is about to go down include over-valuation and bad news in the media. In finance, there is a belief that the market always reflects the true value of a stock. Market efficiency theory predicts that if a stock is undervalued, with time it will rise to its correct level, but if a stock is overvalued, the price will eventually fall. If a financial analyst said that a particular stock was overvalued, that is the stock is trading at a higher price than it should, investors might begin to sell to get a profit or mitigate loss before prices fall. This leads to a faster decline in stock prices than would usually occur. (Learn more about market efficiency in our article: What Is Market Efficiency?)

Another reason why hammering occurs is the expectation of bad news on the part of investors. If an event occurs in a company or there are rumors about a company which is expected to have negative consequences on the financials of a company, investors will immediately begin to sell their stocks because bad news always brings down the price of a stock.

Read To Sell Or Not To Sell for a different perspective on this topic.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. Do stocks that trade with a large daily volume generally have less volatility?

    Stock volatility refers to a drastic decrease or increase in value experienced by a given stock within a given period. There ... Read Answer >>
  2. Why do stock prices change following news reports?

    Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular ... Read Answer >>
  3. If I believe retail sector companies are overvalued how can I profit from a fall ...

    Examine the various trading strategies that can be employed by an investor who anticipates a decline in stock prices in the ... Read Answer >>
  4. If the intrinsic value of a stock is significantly lower than the market price, should ...

    Discover how the intrinsic value and market price of a stock are related and why a stock that appears overvalued may still ... Read Answer >>
  5. How does short selling help the market and investors?

    Find out how short sellers provide a service to the market by acting as a check against overvalued companies and exposing ... Read Answer >>
  6. What is the difference between the bond market and the stock market?

    The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds. The stock market is a place ... Read Answer >>
Related Articles
  1. Investing Basics

    4 Things That Make a Stock a Risky Bet

    Risk is everywhere and when it comes to stocks it can take many forms. From price risk to volatility risk, there’s a lot investors have to look out for.
  2. Active Trading Fundamentals

    The Art Of Cutting Your Losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  3. Active Trading

    Value Investing: Common Alternatives To Value Investing

    There are dramatic differences in the ways different types of investors make their investment decisions. In this section, we'll look at some of the most common investment philosophies and ...
  4. Investing Basics

    Stocks Basics: What Causes Stock Prices To Change?

    Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), ...
  5. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  6. Active Trading Fundamentals

    Five Minute Investing: Things To Avoid

    Building up the last chapter, we are now ready to explore and face the mistakes that nearly every beginning investor makes. Do not skip over this or any other part of the book because you need ...
  7. Investing Basics

    4 Signs Your Value Stock May Be Overvalued

    Value investing can make you money, but you have to look for traps. Overvalued stocks often correct, which means investors need to know when to get out.
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Professionals

    Short Sales

    An investor, who believes that a stock price has appreciated too far and is likely to decline, may profit from this belief by selling the stock short. In a short sale, the customer borrows the ...
  10. Active Trading Fundamentals

    Five Minute Investing: Replacing Stock Market Myths

    In the introduction to "Five Minute Investing", I mentioned that the ideas and approaches developed in this book would be unorthodox. In this chapter, I hope to point out and correct a few of ...
RELATED TERMS
  1. Fully Valued

    A stock whose price analysts believe reflects the market's recognition ...
  2. Overvalued

    A stock with a current price that is not justified by its earnings ...
  3. Stock Market Capitalization To GDP Ratio

    A ratio used to determine whether an overall market is undervalued ...
  4. Hammering

    The rapid and concentrated sale of a stock thought to be overvalued ...
  5. Watered Stock

    Stock that is issued with a value much greater than the value ...
  6. Equity Market

    The market in which shares are issued and traded, either through ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center