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.

RELATED TERMS
  1. Market Disruption

    A situation where markets cease to function in a regular manner, ...
  2. One Night Stand Investment

    A purchased security that was intended for a long-term investment, ...
  3. Mr. Market

    An imaginary investor devised by Benjamin Graham and introduced ...
  4. Bank Run

    A bank run occurs when a large number of customers withdraw their ...
  5. Sell

    The process of liquidating an asset in exchange for cash. The ...
  6. Market Overhang

    An observational theory stating that in certain stocks at certain ...
Related Articles
  1. Investing

    How to Profit From Panic Selling

    When everyone rushes to dump their stocks in what's known as panic selling, you may find yourself with a great bottom-fishing buying opportunity.
  2. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  3. Investing

    3 Tips for Handling Market Swings

    There are three easy things you can do to help stay calm the next time the market takes a dive.
  4. Investing

    Your Investments: When to Sell and When to Hold

    Consider these tips when deciding whether to sell or hold an investment position. Smart investors not only know when to sell, but why and how to sell.
  5. Investing

    Investing Basics: Flight To Quality

    At times of market stress, investors flee from risky assets to investments the safest ones available.
  6. Investing

    Why China Is Suspending Market Circuit Breakers

    Chinese regulators have announced that beginning on January 8th, circuit breakers used to halt its stock markets will be suspended in order to "smooth" trading operations.
  7. Investing

    Why Do Global Markets Freak Out?

    Understanding what stocks are will take the mystery out of their movements.
  8. Investing

    Don’t Panic When the Next Bear Market Happens

    Take advantage of the next bear market and watch your investment in great companies grow.
  9. Trading

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
RELATED FAQS
  1. How can I tell if I'm an emotional investor?

    Successful investors possess the important trait of emotional stability, which means that they base their investment decisions ... Read Answer >>
Hot Definitions
  1. 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 ...
  2. 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.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center