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 stock exchanges 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.
Causes of panic
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:
- High speculation in market (e.g. Dubai's Housing Crash in 2009)
- Economic instability (e.g. The Financial Crisis in 2008)
- Political issues
The Stock Market Crash of 1929
After World War I, the 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. The speculative boom in the 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 the market and led to panic selling as more investors were unwilling to risk additional losses. The market sharply declined and was followed by the Great Depression.
The Financial Crisis in 2008
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.
Dubai's Housing Crash in 2009
Dubai had a significant financial crisis in which its debt accumulated to $80 billion. The state-owned holding company, Dubai World, had liabilities of $60 billion. Its real estate subsidy was at risk to default on repayment of bonds, yet the Dubai government was unsuccessful to make a rescue package for the company. The debt problem of Dubai World triggered mass speculations in the property market. In the first quarter of 2009, house prices in Dubai fell 41%.
The Gold Price Plunge
Many people primarily invest in gold as a hedge against inflation in periods of economic uncertainty. During the second quarter of 2011, the gold price hiked 22.69% and reached its highest price at $1907. On September 23, 2011, the gold price plunged $101.90, or 5.9%, in regular trading which was the first $100 daily price drop since January 22, 1980. While the gold price had reached its top, the global economy was declining. The investors had growing concern in the global economic decline and raised fear for potential price fall. The panic selling took place in the gold market and caused the price plunge.