"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.

  1. How do mutual funds split?

    Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >>
  2. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  3. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  4. What is the difference between a buy limit and a sell stop order?

    A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can ... Read Full Answer >>
  5. What is the difference between a short squeeze and a long squeeze?

    A short squeeze and a long squeeze are situations that can force traders and investors out of their positions. A short squeeze ... Read Full Answer >>
  6. Why does the efficient market hypothesis state that technical analysis is bunk?

    The efficient market hypothesis (EMH) suggests that markets are informationally efficient. This means that historical prices ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  2. Savings

    3 Steps for Retirement Saving and Investing Habits

    We take a look at the choices we make today that our future selves would prefer not to be making, often faced by investors when saving for the future.
  3. Active Trading Fundamentals

    Why Rational Ignorance About Your Investments Might Really Be OK

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
  4. Trading Strategies

    The Traits All Baller Traders Have In Common

    When it comes to traders, these are the traits that separate the wheat from the chaff.
  5. Active Trading

    Bad Luck With Trades? 5 Things You Might Be Doing Wrong

    If you're in a trading rut, ask yourself these five questions to help turn the corner.
  6. Active Trading Fundamentals

    Why Contrarian Investing Is Not Very Smart

    Like most allegedly sure-fire methods in the investment industry, this one has its flaws too.
  7. Active Trading Fundamentals

    Playing It Safe With Trades? Or Holding Yourself Back?

    Fear of breaking out of a comfort zone can prevent an investor from reaching his or her full potential.
  8. Investing Basics

    Why Blue Chip Stocks Are Key to Buy-and Hold Investing

    Several blue chip stocks have proven that buy-and-hold investing still works, even after the huge declines of the Great Recession.
  9. Active Trading Fundamentals

    How Successful Forex Traders Manage Profits

    How to balance anticipated vs. confirmed trades to manage potential profits and lower risks.
  10. Investing Basics

    Hedging for Beginners: A Guide

    People hedge as insurance against market volatility. Anyone can do it; here's a primer.
  1. Head-Fake Trade

    A trade where a stock or market appears to be making a move in ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Outcome Bias

    A decision based on the outcome of previous events without regard ...
  4. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  5. Centipede Game

    An extensive-form game in game theory in which two players alternately ...
  6. Cournot Competition

    An economic model that describes an industry structure in which ...

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center