Updated Mar 30, 2022

What is panic selling?

What is panic selling?

Panic selling is typically based on fear of making excessive losses in the stock market. Sound market logic, or reasoned analysis which causes the prices to drop seldom drives investors to panic selling.

Panic is the instant and far-reaching sale of a security. In most cases, the factor driving panic selling is an outside event that leads a security's price to instantly reduce and in turn, induces fear.

People react to this fear and sell their securities such that further losses are safeguarded against. But, when too many investors simultaneously involve themselves with panic selling, the prices reach lower still. This induces further panic in the markets and results in a positive feedback loop. In an event such as panic selling, stock exchanges typically halt trading, such that the cycle of fear and selling is broken. This is via defining halts and curbs at predefined breaking points over commodity prices.

A closer look at panic selling

In nearly all cases, panic selling results from investors intending to liquidate their holdings. Herein, they do not pay much regard to the price at which they intend to sell before a further deterioration in prices takes place.

Different factors could lead to panic selling, and these factors vary in intensity.

One of the key factors that result in panic selling is an event that causes a drastic reduction in investor confidence, in any particular sector or security. There is a range of factors to which such events are related. This may include management decisions or changes, earnings, revenue levels, and sales growth.

Decreased strength in an investment's fundamentals is what triggers initial selling. Price point levels result in further losses. This triggers programmed market trading from stop-loss orders.

Another important factor associated with panic selling is highly emotional trading or irrational exuberance. Fear drives these trades, and so does overreaction to news whose effects may be limited to the short term only. Market sentiment also plays an important role here.

In most stock exchanges, trading halts and curbs have been put in place to set limitations on panic selling. This way, people can digest information regarding the underlying causes of the panic selling event in question. An investor's downside losses which could occur in a single day are hence limited. A certain degree of normalcy is then restored in the markets.

Financial Market Sell-Offs

Another commonplace occurrence that takes place in financial markets is sell-offs. In all likelihood, sell-offs are going to be less severe than panic selling, which takes a dramatic turn. When a sell-off takes place, widespread selling takes place in any particular sector, merely because only a few companies give a negative pass. A sell-off is likely to take place across markets, broadly, when different asset classes begin to report trends. As an important example, the treasuries that are high yielding could cause sell-off inequities.

Opportunities Post Panic Selling

There are a few cases wherein broad market sell-offs and panic selling induces opportunities for buying. This stands to be particularly true when short-term uncertainties or indicators result in selling.

In such cases, the volatility in the markets is remarkable. Even on a day-to-day basis, the events that unfold render a drastic transformation in the outlook.

At any time, numerous market traders are on the lookout for selling opportunities. When they invest at a lower price, it becomes more attractive. When we take technical analysis under consideration, the exhausted selling model is a technique that facilitates the identification of price trading. A reversal is then likely to follow.

There are several phases that the prices are then likely to go through, once descend from panic selling initiates. So, skillfully identifying the trough buying opportunity and following a stock’s downward trend is what this model depends upon.

Upper and lower circuits in stock markets

There are two types of circuit filters in markets – market-wide filter and stock level filter. Let us consider what stock-level circuit filters are.

The sharp movement of stocks in any direction, up or down, causes the stock to hit the circuit. Another case when a stock hits the circuit is when the stock reaches its maximum permissible tradeable price level for a day.

If the movement is upward, then the stock hits the upper circuit and vice versa.

Why is it a must to have circuit filters in place?

• On a day, circuit filters regulate price fluctuation
• On days of panic or euphoric selling, circuit filters act as market curbs
• Price manipulation by stock operators is curbed to an extent by circuit filters

What are the different daily limits?

Depending on its category, a stock can move 5%, 10%, or 20% in either direction, on any given trading day.

It is noteworthy here that the maximum permissible limits for stocks are calculated based on their previous day's closing price on exchanges

A stock that has hit the upper circuit cannot move any further higher on that day. But, the stock can still move lower.

The latter scenario takes place when there is fresh supply at a level lower than the circuit filter price.

Similarly, if it so happens that the stock hits the lower circuit, then it cannot fall any further. But since plenty of sellers will be available, one can buy at the lower circuit.

Who decides these circuit filters?

SEBI, or Securities Exchange Board of India, which is the market regulator sets the circuit filters. These circuit filters are also revised, based on any unusual activity or market volatility in certain counters.

Apart from these, based on market liquidity, circuit filters are periodically revised as well. These period adjustments safeguard investors' interests in lesser-known stocks. For stocks with good liquidity, circuit filters are hiked. Similarly, for illiquid stocks, circuit filters are lowered.

What is the Expiry date?

The expiry date is a date on which a particular contract, typically a derivative contract expires. All derivative contracts that are based on underlying securities, such as a commodity, currency, or stock have an expiry date. The underlying security, nevertheless, does not have an expiry date.

A derivative contract based on underlying security exists only for a specified period. The contract ends on its expiry date.

It is on this expiry date that the buyer and the seller finally settle the derivative contract. The settlement, herein, takes place in the following ways:

1. Physical delivery

Under any particular contract, when physical delivery is done for the underlying security, it is usually for a commodity. The buyer receives the quantity from the seller of the contract by paying the full price for the commodity, as mentioned in the contract.

1. Cash Settlement

Cash settlement implies the settlement of the difference between the derivative price and the spot price via exchange of money and not the underlying security itself. As of current, equity derivatives are settled by cash in India.

The expiry date is the last working Thursday of the month when the contract expires, in the case of Indian stock exchanges.