How to sell a stock in a crashing market?

Question

Every now and then the market undergoes a correction or a crash. During these events the value of stocks falls quickly.

If I want to sell a stock I'll need a buyer. During crashes and corrections the amount of sellers is of course higher than the amount of buyers, making it difficult to sell stocks.

Question: Is it possible to sell stocks during a market drop? Whats the best strategy for selling stocks during a drop?

Edit: What I mean with "during crashes and corrections the amount of sellers is of course higher than the amount of buyers" is that the supply is higher than the demand during a crash.

Answer 1

Assuming you are referring to macro corrections and crashes (as opposed to technical crashes like the "flash crash") --

It is certainly possible to sell stocks during a market drop -- by definition, the market is dropping not only because there are a larger number of sellers, but more importantly because there are a large number of transactions that are driving prices down.

In fact, volumes are strongly correlated with volatility, so volumes are actually higher when the market is going down dramatically -- you can verify this on Yahoo or Google Finance (pick a liquid stock like SPY and look at 2008 vs recent years).

That doesn't say anything about the kind of selling that occurs though. With respect to your question "Whats the best strategy for selling stocks during a drop?", it really depends on your objective.

You can generally always sell at some price. That price will be worse during market crashes. Beyond the obvious fact that prices are declining, spreads in the market will be wider due to heightened volatility. Many people are forced to sell during crashes due to external and / or psychological pressures -- and sometimes selling is the right thing to do -- but the best strategy for long-term investors is often to just hold on.

Answer 2

It is typically possible to sell during a crash, because there are enough people that understand the mechanics behind a crash.

Generally, you need to understand that you don't lose money from the crash, but from selling. Every single crash in history more than recovered, and by staying invested, you wouldn't have lost anything (this assumes you have enough time to sit it out; it could take several years to recover).

On the other side of those deals are people that understand that, and make money by buying during a crash. They simply sit the crash out, and some time later they made a killing from what you panic-sold, when it recovers its value.

Answer 3

Your question contains a faulty assumption:

During crashes and corrections the amount of sellers is of course higher than the amount of buyers, making it difficult to sell stocks.

This simply isn't true. Every trade has two sides; thus, by definition, for every seller there is buyer and vice versa. Even if we broaden the definition of "buyers" and "sellers" to mean "people willing to buy (or sell) at some price", the assumption still isn't true. When a stock is falling it is generally not because potential buyers are exiting the market; it is because they are revising the prices they are willing to buy at downward.

For example, say there are a bunch of orders to buy Frobnitz Consolidated (DUMB) at $5. Suppose DUMB announces a downward revision to its earnings guidance. Those people might not be willing to buy at $50 anymore, so they'll probably cancel their $50 buy orders. However, just because DUMB isn't worth as much as they thought it was, that doesn't mean it's completely worthless. So, those prospective buyers will likely enter new orders at some lower value, say, $45. With that, the value of DUMB has just dropped by $5, a 10% correction. However, there are still plenty of buyers, and you can still sell your DUMB holdings, if you're willing to take $45 for them.

In other words, the value of a security is not determined by the relative numbers of buyers and sellers. It is determined by the prices those buyers and sellers are willing to pay to buy or accept to sell. Except for cases of massive IT disruptions, such as we saw in the "flash crash", there is always somebody willing to buy or sell at some price.

Answer 4

What is essential is that company you are selling is transparent enough. Because it will provide additional liquidity to market.

When I decide to sell, I drop all volume once at a time. Liquidation price will be somewhat worse then usual. But being out of position will save you nerves for future thinking where to step in again. Cold head is best you can afford in such scenario.

In very large crashes, there could be large liquidity holes. But if you are on upper side of sigmoid, you will be profiting from selling before that holes appear.

Problem is, nobody could predict if market is on upper-fall, mid-fall or down-fall at any time.