Loading the player...
A:

By definition, capitulation means to surrender or give up. In financial circles, this term is used to indicate the point in time when investors have decided to give up on trying to recapture lost gains as a result of falling stock prices. Suppose a stock you own has dropped by 10%. There are two options that can be taken: you can wait it out and hope the stock begins to appreciate, or you can realize the loss by selling the stock. If the majority of investors decides to wait it out, then stock price will likely remain relatively stable. However, if the majority of investors decides to capitulate and give up on the stock, then there will be a sharp decline in its price. When this occurrence is significant across the entire market, it is known as market capitulation.

The significance of capitulation lies in its implications. Many market professionals consider it to be a sign of a bottom in prices and consequently a good time to buy stocks. This is because basic economic factors dictate that large sell volumes will drive prices down, while large buy volumes will drive prices up. Since almost everyone who wanted (or felt forced) to sell stock has already done so, only buyers are left - and they are expected to drive the prices up. (If you are unfamiliar with these principles, check out our Economics Basics Tutorial.)

The problem with capitulation is that it is very difficult to forecast and identify. There is no magical price at which capitulation takes place. Often, investors will only agree in hindsight as to when the market actually capitulated.

For more on this topic, check out the article Capitulation Defined.

RELATED FAQS
  1. Why does a crisis in emerging markets cause U.S. Treasury yields to decrease?

    The reason that you will often see the yields on Treasuries fall when you see a financial crisis in an emerging or foreign ... Read Answer >>
Related Articles
  1. Insights

    Connecting Crashes, Corrections And Capitulation

    Even though crashes, corrections and capitulations are bad news for investors holding the stock, there are still ways to profit.
  2. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  3. Insights

    3 Ways To Tell If Your Stock Has Bottomed

    No one can call stock bottoms with absolute certainty, but there are some common trends that appear when stocks are about to hit bottom.
  4. Trading

    An Option Strategy for Trading Market Bottoms

    The reverse calendar spreads offers a low-risk trading setup that has profit potential in both directions.
  5. Small Business

    Five Investing Pitfalls To Avoid, According to Investor's Business Daily

    Common sense or common folly? Discover some approaches to circumventing typical stumbling blocks on the road to profitable investing.
  6. Investing

    Buy High, Sell Much Higher

    Value investing may seem fool-proof, but it carries more risk than you might know.
  7. Investing

    Is it Risky to Invest in Options?

    Investing with options can be a great strategy, but you need to do your research first or the risks can outweigh the benefits.
  8. Investing

    5 Tips On When To Sell Your Stock

    Many investors say knowing when to buy a stock is no big deal: It’s knowing when to sell that’s difficult. Here are five tips to help make the call.
RELATED TERMS
  1. Capitulation

    When investors give up any previous gains in stock price by selling ...
  2. Hammer

    A price pattern in candlestick charting that occurs when a security ...
  3. Depreciation Recapture

    The gain received from the sale of depreciable capital property ...
  4. Equity Market

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

    An analyst's recommendation to neither buy nor sell a security. ...
  6. Stock Market

    Exchanges or over-the-counter markets in which shares of publicly ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center