What Is a Sell-Off?
A sell-off occurs when a large volume of securities are sold in a short period of time. Due to the law of supply and demand, this causes a corresponding decline in the price of the security.
There are several potential causes of a sell-off. In the stock market, common causes include the release of disappointing earnings reports, fears of increased competition, or the threat of technological disruption. Broader causes, such as macroeconomic concerns or natural disasters, can also trigger sell-offs.
Although sell-offs are dramatic to behold, they are generally short-lived declines which stabilize or reverse themselves relatively quickly.
What is a Sell-Off?
How Sell-Offs Work
Sell-offs occur based on the principle of supply and demand. If a large number of investors decide to sell their holdings without any compensating increase in buyers, the price of that investment will fall.
Sell-offs are a reflection of investor psychology. For instance, if a sell-off occurs after a new earnings report, the sellers may have been overly optimistic about that security when they bought it beforehand.
For contrarian investors, sell-offs can present an opportunity to buy at low prices. If investors believe that the sell-off was unwarranted or overly extreme, they might take the opportunity to buy the security at a “bargain” price.
Real World Example of a Sell-Off
A notable example of a sell-off occurred in April 2010 during the Deepwater Horizon oil spill. During that month, the Deepwater Horizon offshore oil drilling platform exploded off the coast of Louisiana, eventually discharging the equivalent of almost 5 million barrels of oil into the Gulf of Mexico.
In addition to its environmental impact, this event had a severe effect on the shareholders of British Petroleum (BP), which was responsible for operating Deepwater Horizon. In the months following the oil spill, BP’s shares lost over 50% of their value, spurred by a hundredfold increase in selling volume. Understandably, investors were fearful of potential fines and legal consequences.
In the end, the Deepwater Horizon oil spill ended up costing BP over $40 billion in fines and settlements, and contributed to its quarterly loss of $17 billion in July 2010.
Depending on the cause of the sell-off and the fundamentals of the security in question, sell-offs can present attractive opportunities to "buy low" and "sell high".
By November 2010, however, BP’s financial performance showed signs of recovery, ending the quarter with a profit of $1.8 billion. Accordingly, the share price recovered about half of its losses by the end of the year.
For many contrarian investors, this sell-off provided an attractive buying opportunity. Those who went against the grain and purchased BP’s shares at their most depressed prices saw their shares rise by over 30% by the end of the year.