Recently, the word capitulation has been getting a lot of play in the press. If a few of you have no idea what the word means don’t feel bad; until last week, I had no idea myself.
By definition capitulation means to surrender or give up. However, in financial circles this term is used to show a point in time when investors have decided to give up on trying to make back lost gains as a result of falling prices.
Example: Suppose a stock you own has dropped by 20%. There are two options that can be taken: you can wait it out and hope the stock begins to go up, or you can take the loss by selling the stock. If the majority of investors decide to wait it out, then the stock price will likely remain relatively stable. However, if the majority of investors decide to capitulate and give up on the stock, then there will be a drastic decline in the price. When this happens in large scale across the entire market, it is known as market capitulation.
There is a saying that the bear market will be over when all investors have capitulated. With so many people searching for the bottom, it can be hard to quantify where that point is, when it can be relatively subjective. With the way the market has been over the last month or so it’s even tougher to tell where the bottom is. Historically speaking, the bottom has been hit dramatically with mass sell offs and other times it’s been a slow process. Either way someone will make a fortune from this time of uncertainty will it be you or will you capitulate?
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