Capitulation describes the moment when an investor decides to surrender and sell stock at a loss.

The point of capitulation is a sign that they believe the stock is no longer worth keeping in their portfolios.

To understand how capitulation works, it helps to remember the word means "to surrender." Say, for example, a company releases a poor earnings report. In response to that report, demand for the stock may decrease, and investors may decide to sell their shares.

capitulation does not automatically mean a company and its stock are in trouble. Investors buy and sell stocks for many different reasons. If the company's fundamentals are strong, it should remain profitable. In that case, a dip in stock prices may be temporary.

Market capitulation happens when the majority of investors decide to sell their investments within a specific period. The result can be panic selling across the broader market as other investors react.

If you invest in the stock market, knowing about capitulation can help you make buying and selling decisions. Investors who panic when the price of a stock drops may be tempted to sell the stock and accept the loss.

hose who understand what capitulation is and how it works may be willing to ignore the panic. This can be significant because a surprising number of investors who sell at a loss stay out of the market permanently and may miss out on the recovery and future gains.

Knowledge of capitulation also can help investors understand their own levels of risk tolerance. Those who panic at the first sign of a price drop may need to reevaluate their investment strategies. They may need to lower their exposure to the stock market.