What is Capitulation?
Capitulation is when a whole bunch of people who own stocks get really scared and sell their stocks really fast. It happens when the stock market drops a lot in a short time.
Why do people sell when they’re scared?
People get worried that the stocks they have will keep going down. They think “I better sell now before I lose even more money!” So a ton of people rush to sell their stocks all at once.
What does it look like?
When capitulation happens, you see the stock prices dropping super fast. And it’s not just a few people selling. It’s a huge number of people selling a massive amount of stocks. This is called “high volume”.
The Good Side of Capitulation
It might mean the worst is over
Some experts think that capitulation can actually be a sign that the stock market is done dropping. They say that once everyone who was going to panic and sell has already sold, the only direction for the market to go is back up.
Bargain hunters dive in
After a capitulation, some brave investors called “bottom fishers” start swimming around, looking for good deals. They think “hey, everyone else sold in a panic, so there must be some great bargains out there now!” They start buying up stocks at the new low prices.
The Bad Side of Capitulation
It’s super stressful
For the people who own stocks, capitulation is a really scary time. Watching the value of your investments plummet is a horrible feeling. A lot of people can’t handle the stress and emotion of it.
You might sell at the worst time
The problem is, if you sell in a panic during capitulation, you’re probably selling at the worst possible time. The price is super low because everyone else is panicking too. If you had just held on a little longer, the price might have gone back up and you wouldn’t have lost so much.
What to Do During Capitulation
Don’t panic
The most important thing is not to let fear take over. Yes, seeing the stock market crash is terrifying. But making decisions based on fear is usually a bad idea. Take some deep breaths and try to stay calm.
Consider holding on
If you don’t desperately need the money right now, consider just riding it out. History shows that the stock market always goes back up eventually. By holding on, you avoid locking in your losses.
Talk to an expert
If you’re really unsure what to do, talk to a financial advisor. They can help you figure out the best plan for your specific situation and goals.