What is Panic Selling
Panic selling refers to wide-scale selling of an investment, causing a sharp decline in price. In most instances of panic selling, investors just want to get out of the investment, with little regard for the price at which they sell.
BREAKING DOWN Panic Selling
Panic selling can be caused by various factors. It can also range in severity. In some instances, panic selling may also be known as a selloff.
Panic Selling Catalysts
Panic selling is often triggered by an event that significantly decreases investor confidence in a stock. Events can be related to a variety of factors including sales growth, revenue levels, earnings, management changes or decisions, and more. Initial selling of an investment is typically triggered by decreased strength in its fundamentals. Further losses can accumulate from price point levels that trigger programmed market trading from stop loss orders. (See also: How to Profit from Panic Selling)
A significant factor in panic selling can be irrational exuberance or highly emotional trading. These trades can be driven by fear, market sentiment and overreaction to news that may only have short-term affects.
Most major stock exchanges will use trading curbs and halts to limit panic selling. This allows people to digest information on why the selling is occurring. It also limits the downside losses an investor can incur in a single day and restores some degree of normalcy to the market.
Financial Market Selloffs
Selloffs are also a common occurrence in the financial markets that may be typically less severe than dramatic panic selling. In a selloff a particular sector may see widespread selling due to the negative press from only a few companies. Selloffs also occur broadly across the market when trends in various asset classes are reported. For example, higher yielding Treasuries can lead to a selloff in equities.
Opportunities in Losses
In some cases, panic selling and broad market selloffs can create buying opportunities. This is especially true when selling is caused by short-term indicators or uncertainty. Markets are often extremely volatile and views on unfolding events can alter the outlook drastically from day to day.
Many market traders watch for selling opportunities that may make the investment more attractive at its lower price. In technical analysis, the Exhausted Selling Model is one technique traders can use to identify the price trading trough for which a reversal is likely to follow. Prices will go through a number of phases as they descend from panic selling so this model relies on following a stock’s downward trend and skillfully identifying the trough buying opportunity.