Panic selling

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 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.

The panic is typically the “fear that the market for a particular industry, or in general, will decline, causing additional losses.” In event of panic selling, the market is flooded with securities, properties or commodities that are being sold at lower prices, in which further stumbles prices and induces more selling. Common causes of panic selling are:

After World War I, United States experienced significant economic growth that was fueled by new technologies and improved production processes. Industrial production output increased 25% between the years 1927 and 1929. Speculative boom in stock market resulted from the expanding economy and the market indices moved up nearly 400% from 1926 to 1929. In late October 1929, the decline emerged in market and led to panic selling as more investors were unwilling to risk additional losses. The market sharply declined and it was followed by the Great Depression.

The mortgage crisis led to public concern over the ability of financial institutions to cover their exposures in the subprime loan market and credit default swaps. As more financial institutions such as Lehman Brothers and AIG reported their failures, the market instability deepened and more investors withdrew their investments. In October, the stock market crash occurred. Dow Jones Industrial Average fell 1,874 points or 18.1% during Black Week which began on October 6. In that same month, S&P 500 and the Nasdaq Composite reached their lowest level since 2003.

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