Definition
Panic selling is a wide-scale selling of an investment which causes a sharp decline in prices. Specifically, an investor wants to get out of an investment with little regard of the price obtained. The selling activity is problematic because the investor is selling in reaction to emotion and fear, rather than evaluating the fundamentals. Most major stock exchanges use trading curbs to throttle panic selling, providing a cooling period for people to digest information related to the selling and restore some degree of normalcy to the market.
Panic Selling
What is ‘Panic Selling’
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.
Explaining ‘Panic Selling’
The main problem with panic selling is that investors are selling in reaction to pure emotion and fear, rather than evaluating fundamentals. Almost every market crash is a result of panic selling. Most major stock exchanges use trading curbs and halts to limit panic selling, to allow people to digest any information on why the selling is occurring, and to restore some degree of normalcy to the market.
Further Reading
- Alexander Hamilton, central banker: crisis management during the US financial panic of 1792 – www.jstor.org [PDF]
- The panic effect: possible unintended consequences of the temporary bans on short selling enacted during the 2008 financial crisis – heinonline.org [PDF]
- The Effect of Short-selling Mechanism on the Volatility of Stock Markets: Evidence from Hong Kong Market [J] – en.cnki.com.cn [PDF]
- A panic-prone pack? The behavior of emerging market mutual funds – link.springer.com [PDF]
- Financing banking crises: lessons from the panic of 1907 – www.sciencedirect.com [PDF]
- Stock market panics: A test of the efficient market hypothesis – www.tandfonline.com [PDF]
