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. If everyone is selling in a bear market, does your broker have to buy your shares ...

    A broker won't lose money when a stock goes down because he or she is usually nothing more than an agent acting on sellers' ... Read Answer >>
Related Articles
  1. Investing

    A Stock Sell-Off Vocabulary Guide

    When stocks sell-off, a whole bunch of new financial terms start popping up that you may not be familiar with. Here's our cheat sheet to help you out.
  2. Investing

    Market Timing Tips Every Investor Should Know

    Market timing rules benefit investments by finding the best prices and times to take exposure and book profits. Use these tips to protect your portfolio.
  3. Trading

    Will Shake Shack Shake Its Bearish Trend?

    We look at Shake Shack's troubled performance and whether a breakout may be in the cards.
  4. 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.
  5. Investing

    When to sell a stock

    Buying at the right price determines profit, but selling a stock at the right price locks it in.
  6. Trading

    Wells-Fargo Mea Culpa Could Send Stock Flying (WFC)

    Wells-Fargo is likely to play catch up with high flying rivals when market players believe the fake account scandal has finally taken its toll.
  7. Trading

    Avoid U.S. Automaker Stocks Despite Trade Talks

    U.S. automaker stocks are bouncing at support but have broken bullish patterns and could hit lower lows in coming months.
  8. 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.
  9. Trading

    Snap Stock May Have Bottomed Out

    Short-term technical readings and heavy bottom fishing could finally signal the end of the painful downtrend.
  10. Investing

    Understanding Market and Full Risk Cycles

    Investor need to understand the four stages the markets tend to experience.
RELATED TERMS
  1. Surrender Period

    The surrender period is the amount of time an investor must wait ...
  2. Hammer

    Hammers are a price pattern in candlestick charting that occurs ...
  3. Federal Subsidy Recapture

    The payment of a tax, after the sale of home originally purchased ...
  4. Triple Bottom

    A triple bottom is a bullish chart pattern used in technical ...
  5. Recapture Clause

    A provision usually found in percentage leases, especially in ...
  6. Double Top

    A double top is a chart pattern, characterized by two consecutive ...
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center