What is Panic Selling?
Panic selling is the sudden, widespread selling of a security based on fear rather than reasoned analysis causing its price to drop. Often, panic selling is due to some outside event that causes a security's price to drop, which leads to widespread fear. This fear causes people to overreact and sell the security to try and prevent further losses, but due to the large number of people doing this at once, it pushes the price lower, which results in more panic, leading to a positive feedback loop. Stock exchanges will often halt trading in the event of panic selling to break this cycle of fear and selling.
- Panic selling is the sudden, widespread selling of a security based on fear rather than reasoned analysis causing its price to drop.
- Panic selling is often triggered by an event that significantly decreases investor confidence in a security or sector.
- Most major stock exchanges will use trading curbs and halts to limit panic selling.
Understanding Panic Selling
Panic selling is, almost always, a byproduct of investors wanting to liquidate their holding, with little regard for the price at which they sell, before prices decline further. Panic selling can be caused by various factors and can range in severity.
Panic selling is often triggered by an event that significantly decreases investor confidence in a security or sector. 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.
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. For example, if the current (Aug. 2019) trade tensions between U.S. and China deteriorate further, it might cause investors to flee markets en masse, resulting in a precipitous drop in global stock markets.
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 Sell-Offs
Sell-offs are also a common occurrence in the financial markets that may be typically less severe than dramatic panic selling. In a sell-off, a particular sector may see widespread selling due to the negative press from only a few companies. Sell-offs also occur broadly across the market when trends in various asset classes are reported. For example, higher yielding treasuries can lead to a sell-off in equities.
Post Panic Selling Opportunities
In some cases, panic selling and broad market sell-offs 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 from 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.