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. How do I build a profitable strategy when spotting a Hammer pattern?

    Understand how analysts use the hammer candlestick pattern to establish trading strategy to enter and exit the trade and ... 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. 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 >>
  5. How are Hammer patterns interpreted by analysts and traders?

    Understand the components of the hammer candlestick pattern, and learn how traders and analysts interpret this pattern when ... Read Answer >>
Related Articles
  1. Trading

    Stocks With Hammer Candlestick Patterns

    These four stocks may have reached their bottoms.
  2. Retirement

    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.
  3. Investing

    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?
  4. Investing

    Battered Stocks That Bounce Back

    Companies with falling revenues can be profitable, but choose them with care.
  5. Trading

    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.
  6. Investing

    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.
  7. Investing

    4 Reasons Why Selling Is Harder Than Buying

    Understand why selling stocks is harder than buying them, and develop strategies for establishing investment goals with price targets.
  8. Investing

    Where NOT to Buy Property Anytime Soon

    Equities are dancing on the edge of a cliff. Considering this riskiness, should investors be looking to real estate? If so, where?
  9. Investing

    5 Tips On When To Buy Your Stock

    Here are some ideas to help you identify stocks that have a good chance at making you money.
  10. Insights

    Real Estate: How the Bubble Will Pop

    This real estate bubble is much different from the last one. Understanding it is imperative if you plan on making any investments.
RELATED TERMS
  1. Overvalued

    A stock with a current price that is not justified by its earnings ...
  2. Hammering

    The rapid and concentrated sale of a stock thought to be overvalued ...
  3. Golden Hammer

    An excessive dependence upon a specific tool to perform all sorts ...
  4. Stock Market Capitalization To GDP Ratio

    A ratio used to determine whether an overall market is undervalued ...
  5. Hammer

    A price pattern in candlestick charting that occurs when a security ...
  6. Fully Valued

    A stock whose price analysts believe reflects the market's recognition ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  5. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  6. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
Trading Center