What it is:
Panic selling is the sudden and widespread selling of a security.
How it works (Example):
Panic selling may occur after a sudden, sharp decline in the price of a security. Panic selling does not involve an evaluation of the fundamentals of a stock or market conditions. Rather, it is usually the result of an emotional reaction and fear, causing sellers to want to get out of an investment without regard to the price or cost.
Why it Matters:
Panic selling is typically driven by fear that the market for a particular industry, or in general, will decline, causing additional losses. Panic selling however, can have the effect of flooding the market with securities that are being sold at lower and lower prices, thereby driving the price down and causing more selling. Most market crashes have been caused by panic selling.
Most securities exchanges have instituted safeguards against panic selling, limiting automatic trades which may increase panic selling once it starts and even suspending market trading altogether when declines reach a certain point. The intention is to provide information that can be digested and considered by investors and to give the opportunity for the panic selling to subside.