Stock selloffs are a common occurrence and can be extremely disruptive to markets. A stock selloff is when a large volume of stocks are sold in a short period of time, which causes the price of that security to quickly fall leading to a rapid succession.
Selloffs can occur and encompass the total market as an aggressive form of a bear market, or it can be focused on a singular industry or asset class. While selloffs may seem like a negative for investors, it isn’t always a bad thing as this is a way for markets to correct themselves when stock prices get too high. As an investor, it is important to understand why selloffs happen and have a plan of action as to how you will respond. Read on to learn more about stock selloffs.
What is a Stock Selloff?
A stock selloff is when a large volume of a security is sold in a short period of time. Benzinga covers some of the different types of selloffs that can occur.
A market selloff is when investors sell off a large volume of securities in a short period of time across an entire market. This event encapsulates a period of time where investors are more willing to sell securities than buy them. This type of selloff occurs across several asset classes at once but may vary in scope. Generally, a market wide selloff can be an indicator of a stock market crash. Causes of a market selloff include worsening economic conditions, uncertainty surrounding the outlook of the market, natural or political disasters and pessimism about the economy.
A stock selloff is a more narrow occurrence of a market selloff. In this case, rather than a large volume of securities being sold off in a market as a whole, a certain industry or individual asset is targeted. Some reasons for a stock selloff include poor earnings reports, fear of increasing competition and threat of disruptive technologies. Generally though, stock selloffs are linked to bad news about the underlying asset. Stock selloffs can be categorized as either a market correction or a bear market. Typically when an index drops by around 10%, the selloff is seen as a correction; however, if the index drops by 20% or more it is considered a bear market.
Should you buy During a Selloff?
The uncertainty surrounding selloffs can definitely make it harder to decipher whether or not you should continue to buy stocks. Remember that no matter how bad the downturn, the market has historically rebounded. Many investors believe that selloffs offer an entry point to make investments at a discount.
It can be a good idea to invest when markets are down, and many investors will take advantage of lower prices to attempt to earn higher returns. However, if you don’t have savings or an emergency fund, it is best to start there before investing money. Don’t invest money you aren’t willing to let go of, as things could take a turn for the worse.
Are Stock Selloffs a Sign of Trouble?
Stock selloffs can be an indicator of trouble in the stock market. A good rule of thumb is that once an index surpasses a 20% decrease, a bear market is among us.
A selloff isn’t always a bad thing. Markets are self correcting, and selloffs are one way of correction. When investors sell off a large volume of stock, it increases that stock's supply, thus lowering the price. A 10% drop in index will signify a correction to investors.
How Should Investors Respond to Selloffs?
In response to a selloff, investors should remain level-headed and remember that up to a certain point, stock selloffs are not a bad thing. Generally what happens after a selloff is other investors see the share price decreasing and by human nature they follow and sell their shares. This practice creates momentum of false concern and continues to drive share prices down.
Overall, if you find yourself amid a stock selloff, the best option is often to hold your investment and take advantage of the discounted prices. Selling shares after a selloff can be particularly harmful to your portfolio, and you may be better off waiting it out. Furthermore, as an investor you should take advantage of these entry points and discounted share prices by making smart investments in companies you believe will rebound stronger after the correction occurs.
Frequently Asked Questions
Should I sell market correction?
Selling during a market correction where the share price decreases can be a mistake. However if the market corrections drive share prices up, that could be a good time to sell.
Who buys stocks on selloffs?
Generally, longer term investors will take advantage of stock sell-offs decreasing share prices, meaning they can buy at a discount. Furthermore, it takes time for stocks to rebound, so buying during a sell-off may not be ideal for shorter term investors like day traders.