What does market capitulation mean?

Posted on: June 1st, 2022
By: Tadeo Lemus

To surrender or give up is the literal meaning of capitulation. In finance, this term refers to the moment when investors decide to give up on trying to regain lost profits as a result of declining stock values. Assume you own a stock that has fallen ten percent.

There are two options: waiting it out and betting on the stock’s appreciation, or recognizing a loss by selling it. If most investors choose to wait it out, the stock price is likely to stay level.

However, if the majority of investors give in and abandon their positions, the stock’s price would plummet. Market capitulation occurs when there’s a big sell-off across the board in the market.

The significance of capitulation is by nature the end result, stocks drop. Many market experts believe it is a signal of a bottom and, as a result, an excellent moment to purchase equities.

This is due to the fact that basic economic factors suggest that high sell volumes will depress prices, while high buy volumes will lift them.

Since almost everyone who was compelled to sell stock has already done so, only buyers remain – and they are expected to push the prices higher.

The difficulty with capitulation is that it’s nearly impossible to anticipate and identify. There is no set price at which capitulation occurs. Investors are frequently only able to agree in hindsight as to when the market truly capitulated.

The aftermath of market capitulation

It’s something that analysts and big investors pay attention to because it might indicate the bottom of a down market cycle, potentially implying brighter days ahead. However, determining when it occurs is more difficult, and it’s easier to see in hindsight.

According to financial experts, it is a daunting period for most retail investors who are saving and putting money in markets for the long run, but it warrants little action.

It’s been proved over and over that if you sell your assets on the market’s lowest days, you’ll miss out on some of the greatest recovery days, which can harm your portfolio in the long run.

Additionally, market downturns may provide investors with opportunities.

If investors are selling a stock because they are afraid of it, this might be an excellent opportunity for other investors to buy it at a lower price and benefit from the decline. To offset future gains, investors who sell at a discount can deduct those losses for tax purposes.

Don’t deviate from your original trading plan

When markets are so turbulent, sticking with your plan is much more difficult than it sounds.

Consider going back to your original plan, which was established during better times when there was less emotion. The plan is in place for situations like this.

Check in with your feelings during market downturns. It’s possible that you’re taking on too much risk and you’re having difficulty sleeping at night because you’re concerned about losing money. If that’s the case, consider rebalancing your portfolio to protect against significant drops.

Today’s market condition is especially tough because so many assets are being hit at once.

Almost every area of your portfolio is facing volatility, which isn’t something you’re used to seeing. Focus on what you can influence and stick to your plan to combat this.

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