"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.




Filed Under:

comments powered by Disqus
Trading Center