What is Panic Selling? : NobleTrading Blog

Friday, August 28, 2009

What is Panic Selling?

Panic selling, as the name suggests, is the wide scale selling of instruments such as stocks. This leads to a sharp decline in the prices of the stocks and usually marks the start of a downtrend. Panic selling is often triggered by bad market news or predictions; all of which need not be true.

All kinds of traders - individual and institutional short and long-term traders, investors, fund managers - are often involved in panic selling. The selling activity is so high that everyone wants to get out of their holdings as early as possible without any regard/demand to the prices at which they sell. Most traders involved in panic selling may have to suffer serious losses.

Often it is the pure human emotion of fear and nervousness which controls the panic selling activity rather than the fundamental or technical market analysis. Many times, the media too can add fuel to the fire. Markets follow different prevention methods to counter the panic selling activity (and possible market crash).

Halt of trading activity: trades are halted for the session/day to stop the existing crash and to allow time for traders/investors to evaluate the market.
Offering (detailed) info or news: to counter the lack of info, market suspicions and wrong interpretations.
Restricting some key players: right regulation of market makers, institutional traders and broker dealers can also ease the effect of panic selling.