What is Stock Capitulation? Easy to Understand Guide

Posted August 23, 2022

For example, suppose the shares of XYZ Corp. were trading at $20 at the time of the two-for-one split; after the split, the number of shares doubled, and the shares traded at $10 instead of $20. If an investor has 100 shares at gmarkets $20 for a total of $2,000, after the split, they will have 200 shares at $10 for a total of $2,000. Every 10 shares held by an investor were replaced with one share.

We will help to challenge your ideas, skills, and perceptions of the stock market. Every day people join our community and we welcome them with legacy fx review open arms. We are much more than just a place to learn how to trade stocks. I’d be skeptical if any financial advisor or fund manager asked me to buy the dip. At this time, I’m stockpiling my cash for the big drop and investing when the time is right.

Is capitulation always a bad thing for investors?

It’s often best to wait several trading periods for the price to rebound several percent before opening a position. The hallmark of stock capitulation is a rapid sell-off, resulting in a 10% decline within a single trading period. High trading volume is a natural factor as well, created by the rush of many investors to exit their position. Capitulation refers to a situation in which investors/traders liquidate their existing long stock position during an extended stock price decline. It can be viewed as the moment in which investors/traders lose hope in their long position and accept losses. Capitulation in finance is when a significant percentage of investors can no longer stomach losing money after the value of an asset has tanked, so they sell off at a loss.

Impact on Investors

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Technical analysts use candlestick charts to identify capitulation patterns.
Thus, while a stock split increases the number of outstanding shares and proportionally lowers the share price, the company’s market capitalization remains unchanged.
An interesting example of capitulation occurred with the price of Tesla (TSLA) after reaching its all-time high of $414 on Oct. 31, 2021.

A stock might fall 5% over the course of a month, then continue to fall another 10% in the following month. This short-term 15% drop will put many recent investors underwater in their position. Rather than lose more on a stock that looks set to fall further, they capitulate and sell.

Post-capitulation is theoretically the floor of the stock price, and it’s often much lower than recent floors. Value investors tend to look closely at recent sell-offs for this specific reason. In down-trending or bearish markets, capitulation traps are common. Investors see the broader market struggling and assume that even a slight downturn in a stock is the beginning of a precipitous fall.

WHY WE’RE DIFFERENT

Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more of their initial investment. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success. More recently, we saw a cascade of capitulation during the early stages of the COVID-19 pandemic. It lasted until mid to late March, so in that case, the process took about a month.

Now imagine the same stock is down 15% intraday and the grind of daily disappointment has given way to certain knowledge that you bought a loser that could go even lower. Selling the stock as a result would be an act of capitulation. It doesn’t matter if you own a stock before or after a split because the value won’t change.

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Stock splits can be good for investors because they make a stock’s price more affordable, allowing some investors who were priced out before to buy the stock now.
After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market.
A stock split is a decision by a company’s board of directors to increase the number of shares outstanding by issuing more shares to current shareholders.
Markets, when they turn, they turn quickly, and they turn predictively.

How do you identify capitulation?

Market capitulation happens when investors and traders reach a point where they can no longer tolerate falling prices and sell their assets out of fear and panic. This happens in any asset class, like stocks, bonds, commodities, and is triggered by negative market conditions. Capitulation, derived from the military, means to give up or surrender. Capitulation is the final stage of panic selling, where people will sell at any price to alleviate the pain from seemingly endless selling pressure. A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed.

While stock capitulation could indeed signal a great entry point for a promising stock, it’s by no means a sure thing. Sometimes, over-eager investors enter a position only to see the stock fall lower as stragglers seek to sell on the bounce. Short sellers can also stunt a stock’s recovery after capitulation.

For investors caught in the middle of capitulation, it’s critical to stay composed. This involves recognizing the signs of capitulation and understanding its stages. Here are some ways that you can prepare to protect your investments. There’s no set criteria for the length of a capitulation period, and some markets may take longer to recover than others. For example, the Great Recession of 2008 lasted 18 months, but it took several years for the economy to recover completely.

They remind investors of the market’s cyclical day trading strategies nature and the importance of patience. By studying these events, investors can better prepare for future market downturns. Capitulation happens during a steep and rapid decline in the stock market. Investors, faced with relentless losses, decide to cut their losses, leading to a mass exit.

Impact of Capitulation on the Market

So fear is rampant, the sell-off begins, and we have rapid price drops. An interesting example of capitulation occurred with the price of Tesla (TSLA) after reaching its all-time high of $414 on Oct. 31, 2021. Over the next fifteen months, the stock alternated between sharp drops and brief rebounds. By the opening of 2023, TSLA had reached a low of $101, a loss of more than three quarters. Suppose a stock you own dropped by 30% but you were sure it would bounce back. Imagine it then fell another 20% but it was clear the fundamentals were solid.

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