What is market capitulation in relation to stock markets?

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oi-Roshni

By Roshni Agarwal

Published: Friday, March 28, 2014, 15:08 [IST]

The literary meaning of capitulation signifies surrender and the same goes with the financial world. More particularly, in case of the stock markets, it elucidates the direction in which the market is heading as it is the stage when investors in stocks see no more potential to gain back the lost price levels and surrender.

The phenomena can be more clearly illustrated using the following example- Say, for instance, price of a stock which is held in your portfolio drops by a substantial 20%. You will take either of the stand, wait for the stock to regain the lost value or if required you can sell off the stock at a loss. During such a time i.e. when the stock price is treading southwards and if majority of investors surrender on the stock, the stock shall witness a sharp decline in the price levels. Nonetheless, in case the investors might have adopted a wait and watch policy, the stock would maintain stable price levels instead of sharp decline. And when such a trend holds prominence across the market, the phenomena is referred as market capitulation.

More so different sectoral stocks witness capitulation influenced by different factors, for instance, banking stocks last year were hit due to rupee depreciation which increased bond yields.

Market Capitulation and its significance

The occurrence of market capitulation which results in stock price bottoming is indicative of the time when investors can put their bets on shares. As after being forced to sell off the stock (anticipating no rebound in stock price level) in large volumes prices declined sharply. Nonetheless, the occurrence of the phenomena is hard to predict and even identify.

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