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What Is Capitulation

11 Oct 2023

What is capitulation?

Capitulation is like a panic selling or liquidating of stock in case of price decline. Traders sell stocks due to the fear of further losses after the price declines. It is a concept of willingly giving up all the profits to exit the position. 

The stock market requires lots of patience, as volatility is the most influencing factor to affect the stock's price. The price fluctuations continue in the stock market, confusing the traders if they need to cut losses or wait for the long term. This situation often leads to capitulation.

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Capitulation in financial terms means selling the stocks willingly at a loss to avoid further losses. Once the price starts to decline, traders believe it will continue to fall. Due to the fear of losing all the gains from the current level, they decide to sell the stocks. The capitulation situation is always negative for traders as they give up the potential future profits from their invested capital by selling their stocks at a loss. 

How does capitulation function? 

Many traders avoid the capitulation situations. But when they see that their stock prices have declined to the certain level from where it will take years to be profitable again, they sell their stocks in panic to avoid further loss. 

For instance, you bought stocks worth RS 800 and after a few days; the price declines to RS 500 due to some external factors. Now, you got two options, either to sell the stocks and incur loss, or you can hold it for a long term and wait for the price to rise again. If you choose to sell stocks immediately, you will be in the capitulation situation. 

What are the causes of capitulation? 

This situation can occur in any market condition. It often happens after the continuous downtrend of stock price. The occurrence of capitulation depends on volume and investing trends of traders. 

When a majority of traders believe that stock is good for the short-term, then a massive sell-off will happen. Due to which the price will decline fast. This massive sell-off situation leads to the occurrence of capitulation. 

Causes of capitulation are: 

  • Cash withdrawal by mutual funds
  • Rise in derivative ratio
  • Negative market conditions
  • Market trend transition
  • Dripping financial performance 

Final thoughts

Traders that have extensive knowledge of the market can analyse capitulation for any stocks to make informed investing decisions. If you are buying stocks, buy at capitulation price as it can be the best time to buy a stock. Have an understanding of factors that decline the stock's price to get profit in the stock market.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 

 

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