It's the middle of the night, and you can't sleep. You're tossing and turning, your mind racing as you try to make sense of the mess in your portfolio. The market has been in free fall for weeks, and you've lost half of your investment. Suddenly, you remember hearing about panic selling- is that what's happening now?
You frantically search for an article on the subject, only to find yourself even more confused. Don't worry, we're here to help.
In this article, we will define panic selling, explain how it works, and offer tips on how to avoid it altogether.
What is panic selling?
Panic selling is "the indiscriminate selling of assets, regardless of their underlying value, in an attempt to raise cash quickly." In other words, panic selling is when investors sell off their assets- stocks, bonds, etc.- at any price to get rid of them. This usually happens during market turmoil when investors are worried about further losses.
To describe in more detail for a better understanding, panic selling is a situation in which investors sell their assets at a loss in response to a sudden change in the market. This can happen when investors believe that a market has reached its peak and is about to fall or when they think that the event causing them to sell will negatively impact the market for a long time.
It also often happens when there's no clear indication of what's happening in a particular market. Investors may panic because they don't know what's going on, so they sell to protect themselves from losing money on an investment they made on wrong information.
Panic selling can be very dangerous for unprepared investors, especially if there's no clear indication of what's happening and why—it's often best to wait until you understand what's going on before making any big financial moves.
How panic selling works
The way that panic selling works is when a market crashes or when there is a sudden drop in prices. This causes investors to become worried and sell their assets before they lose any more money. It can happen because investors fear something terrible will happen with the company or because they believe prices will go down even more.
For example, if there is bad news about a company, investors might get very worried about how this will affect the company's performance and how much money they could lose if they continue to hold on to their shares. They might decide to sell their shares immediately rather than wait for them to go up again later to avoid losing money altogether. This kind of thinking is called "panic selling" because it happens quickly without much thought about whether it makes sense.
It typically works through mimetic desire and fear. When a group of influential investors is fearful and broadcasts that fear to the public, it can trigger a sell-off. This happens because other investors start to feel fearful as well and want to sell before they lose any more money. The problem is that this can become a self-fulfilling prophecy—if enough people believe prices will go down, they will go down.
It's human nature to copy to some degree because we have mirror neurons. This works when learning about something but it also works against us. In this case, panic selling is a cascading emotional event.
Sometimes they can be triggered by a severe financial contagion and other times, simply a rumor and an influencer promoting it is all it takes to ignite a major market panic.
Panic selling example
Let's say the stock market crashes and the value of your stocks plummet. You become worried that the market will continue to fall and decide to sell your stocks before you lose any more money.
However, because everyone is selling their stocks, there are more sellers than buyers. This causes the price of stocks to fall even further, leading to more panic selling and a further decrease in prices.
When investors sell their stocks in a panic, it can have a ripple effect on the stock market. Panic selling is when investors sell their shares quickly out of fear or anxiety instead of waiting to see how the stock market will perform.
This happened in the case of a fictional story between Mrs. Pan and Mr. Nick. When it came to investing, Mrs. Pan was always anxious but one news report really spooked her. She read that Mr. Fake, who was a very successful investor, sold all his stocks and got out of the market completely.
She immediately called her broker and told him to sell all her stocks. The problem was that Mr. Fake had not actually sold his stocks—the news report was fake. But by the time Mrs. Pan found out, it was too late and she had already sold her stocks at a loss.
She even told her friend Mr. Nick and due to her influence, he got scared and sold his stocks as well. This is an example of how mimetic desire can lead to panic selling. If enough people believe that prices are going to fall, they will sell their stocks and this can cause prices to actually fall.
What causes panic selling?
There are a few different factors that can cause panic selling. Each person will have their own triggers and criteria that ultimately cause a panic. However, here are the most common causes:
A sudden drop in prices
This is the most common trigger for panic selling. When prices suddenly fall, investors become worried and start selling their assets. No one likes to see their investments lose value and this can cause a lot of anxiety.
Negative news
Another trigger for panic selling is negative news. This can be anything from a company's earnings report to political news. News is known to exaggerate frightening events for more attention because that helps them sell more ad space. However, it can also cause investors to sell their investments as well.
Loss of confidence
When investors lose confidence in a company or the market, they are more likely to sell. For example, if a company loses its competitive edge, has financial troubles, or is involved in a scandal, investors may lose confidence and sell their stocks.
Margin calls
A margin call is when your broker asks you to deposit more money into your account to cover losses. They may sell your shares to cover the shortfall if you can't do this. If too many people can't cover and are forced sellers, a cascading effect can happen and this can trigger panic selling.
Tragic events
Wars, famines, pandemics, etc. cause fear in general. The uncertainty of the future can lead people to sell their assets and invest in more stable options. Staying rational in these times is a difficult task.
Lack of patience
If you need to grow your money in a short time and the markets are showing the types of returns that you need, you may start to feel anxious. This can lead to impatience and cause you to sell your investments even if they are doing well, but not as well as you need or hope.
Anger
When the markets are not going the way you want them to, it can be easy to get angry. This can lead to irrational decisions like panic selling. You might get angry at yourself and start panicking about looking like a fool so you sell at a small percentage loss, rather than a potentially large one.
Herd mentality
Finally, panic selling can occur when investors follow the herd mentality. This is when everyone else is selling, so they sell as well even if they don't have a good reason. Another way to describe this is mimetic desire as mentioned earlier.
Panic sellers might not even know why they are panicking but just because everyone else is, they do it too.
It's called "panic selling" for a reason. The term describes a situation where investors are so irrational that they sell stocks at prices well below their intrinsic value because they're afraid the stock will fall even further and never recover.
Panic selling occurs when people panic and then sell their assets at any price to get out of the market. This causes the price of the asset in question to fall even more, which causes more people to panic, sell, and so on.
Why shouldn't you panic sell?
Panic selling is often driven by emotion and not logic. This can lead to investors selling their shares at a loss. You may miss out on future gains if you sell your shares when the market is down. It's important to remember that the stock market constantly fluctuates, and there will be ups and downs.
Panic selling is the action of selling an asset for an unreasonably low price due to a fear of losing money. The anxiety is caused by market volatility, which can be caused by economic uncertainty and political instability.
However, these factors likely will always be a part of human civilization. No one knows the future and to panic every time there's some sort of chaos in the world would be detrimental to your wealth.
When a market experiences a sudden drop in value, panic often occurs as investors attempt to avoid further losses by selling their assets quickly. However, this can lead to them making losses even greater than those they would have experienced if they had waited until the market stabilized.
By simply being patient, you can realize that the market always fluctuates and there's no need to sell your assets at a loss just because the value has decreased in the short term.
How to avoid panic selling
Prevention is the best cure. When amid a panic, it's difficult to think rationally. The best thing you can do is have a plan in place before the panic happens. This way, you won't make any hasty decisions that you might regret later. There are a few things you can do to avoid panic selling:
Stay informed
Keep up with the latest news and earnings reports. This will help you make logical decisions about when to sell your shares. However, it's also important to read the news only when you are calm and not when the markets are fluctuating.
Have a plan
Have a plan for what you'll do if the market starts to drop. This will help you stay calm and avoid making rash decisions. For example, if your investment thesis remains intact, then there's no reason to deviate from the plan.
Use stop-loss orders
A stop-loss order is an order to sell your shares if they fall below a specific price. This can help you limit your losses if the market starts to drop. Rather than panicking at a major percentage drop, you can take your losses through a pre-planned strategy loss that acts as a write-off.
Diversify and Check your portfolio
Diversifying your portfolio can help reduce your risk. This means investing in different assets, such as stocks, bonds, and cash. This should be easy if you've been following the advice written on this blog. Look at each company's profit over time and compare that to its current price. You'll probably see that there is much room for growth in most companies' stocks—if not now, then at some point in the future.
By diversifying into different undervalued companies in different industries, you'll have room for the price to drop because not every company experiences the same market conditions at the same time.
When they are undervalued, they also provide a safety net in case one of your investments doesn't perform as well as you'd hoped. Undervalued companies that are selling for lower than what you bought can be an even greater buying opportunity.
By creating a diverse portfolio in this way, you are creating opportunities to be excited to buy more rather than panic because you realized you bought when assets were overvalued.
Read up on stocks
Learning about the companies whose stock you own will help you understand why their stocks are doing what they're doing right now—and whether or not those reasons are justified.
This knowledge will help calm your nerves and prevent you from making rash decisions based on fear alone (like panic selling). Panic selling is often caused by a lack of knowledge or understanding about what's going on.
If you educate yourself about investing through a website such as this one, you'll reduce your chances of panic selling.
Take your time
Don't Make any emotional decisions in the heat of the moment. If you're panicking, take a step back and wait until you've had time to calm down and think things through. Invest within your risk tolerance:
For an investor to know whether it is best to panic sell, or wait out the downturn, they should consider their risk tolerance when investing in the first place.
An investor comfortable with taking on risk may be better suited to investing in volatile markets and, therefore, less likely to panic and sell when things do not go according to plan.
Identify your triggers
By knowing what has caused you to panic sell in the past, you can work on addressing those issues. This might mean learning more about investing or working on your emotional state so that you're better able to handle market volatility.
Develop self-awareness
Although it's difficult, it still is possible to stop yourself amid a panic attack. If you can catch yourself before you sell, you may be able to save yourself a lot of money and regret. However, this requires a high degree of self-awareness. By knowing your emotional state and being able to control your emotions, you can prevent yourself from panic selling.
Conclusion
Panic selling can harm the stock market as a whole. It's essential to stay informed and have a plan, so you don't make rash decisions. Diversifying your portfolio and using the techniques listed above can help reduce your risk.
Whether you're a seasoned trader or an amateur just starting, panic selling (and buying) happens to even the most organized and careful of investors. However, there are ways to avoid these emotional mishaps and make the most out of your investments.
By staying informed, cautious, and unemotional, you can not only prevent selling panic but also be prepared for some truly remarkable investment opportunities.