When investors sell their holdings in a panic, it is usually because they are fearful of what may happen in the future. Sometimes this fear is rational, based on new information or rumors. Other times, it may be an overreaction to a small change in the market. In either case, when enough people sell at the same time, it can trigger a sharp decline in prices.
Panic selling often starts with good reason. For example, if there is news of increasing inflation or a bear market, this can lead to decreased confidence in a currency or sector.
As investors, we are often guilty of overreacting to negative news and selling our assets in a panic. This can be amplified when the initial losses reach price points that trigger stop loss orders. A significant factor in panic selling is earlier irrational excitement. The excitement can collapse abruptly at the slightest negative signal.
Overreaction to news that may have only short-term effects is common, but can be costly in the long run.