What is Hammering?
Hammering is a term used for when speculators in a financial market rapidly sell stocks that are perceived to be overvalued. It is done to save potential financial losses. Most commonly, hammering comes after an asteroid event.
- Hammering is a financial term used when speculators rapidly sell a stock that is perceived to be overvalued.
- An asteroid event is an unexpected wave of bad news that directly affects the price of a stock. Some examples include mergers, acquisitions, and bankruptcy.
- An asteroid event directly affects the price of a stock. In most cases, it causes the stock price to plummet and forces investors to hammer their stocks.
What is a Speculator, Stock, and an Asteroid Event?
A speculator is someone who uses precise stock strategies within a short time frame to outperform traditional long-term investors. Because of the short time frame, the amount of risk in investing is much higher. If the right investment is made, the gains offset the risk.
A stock is a financial instrument that is traded on the stock market. It represents a small percentage of ownership of a company.
An asteroid event is a financial term used to describe unexpected bad news that results in the change of a stock price. Some examples of an asteroid event would be a terrorist attack, poor public relations, mergers, acquisitions, and bankruptcy.
If an institutional investor believes that a stock is temporarily mispriced following an asteroid event, they can begin purchasing the stock while everyone else is selling. If the stock is temporarily mispriced, profit can be made. On the other hand, if the stock accurately conveys the real price, losses will be incurred.
Examples of Asteroid Events
An asteroid event is unexpected bad news that causes a direct effect on organizations and can trigger stock prices to fall. To put into context, there are a few examples below of how an asteroid event can trigger stock prices to fall.
- Terrorist Attack: The September 11th terrorist attacks on the World Trade Center caused global stock markets to drop significantly. The effect was felt in other nations, as entire stock exchanges closed due to fear of continued terrorist attacks.
- Poor Public Relations: How an organization addresses the public can affect the stock price.
- Mergers: A merger occurs when two companies combine, forming one singular entity. In terms of stocks, a merger causes the stock prices of the two companies to move in predictably opposite directions in the short-term.
- Acquisitions: An acquisition occurs when one company buys out another company, taking full or partial ownership. Similar to mergers, the stock prices of the companies involved in the deal move predictably in opposite directions. In some cases, an acquisition actually causes the target companies stock to rise due to the premium paid by the acquiring company.
- Bankruptcy: In almost all cases, a Chapter 11 bankruptcy results in shareholders getting completely wiped out. It is crucial to predict if and when a company is going under, so you can hammer off your stock immediately and avoid a potential financial deficit.
Recent Examples of Stocks Hammered by an Asteroid Event
Hammering commonly proceeds an asteroid event. The COVID-19 pandemic has resulted in worldwide business closures, leading investors to rapidly sell their overvalued stocks. Shown below are some of the stocks that have been directly affected by this asteroid event.
- Air Canada: The travel industry has been significantly reduced due to the global pandemic. It has caused Air Canada’s market cap to decline by 67%.
- American Airlines: On the same note as Air Canada, American Airlines’ business has been completely reduced due to the pandemic. The airline’s market cap has fallen by 50%.
- Caesars Entertainment: Caesars Entertainments’ market cap has decreased by 58% as a result of the global pandemic.
- Eldorado Resorts: Since the travel industry has been temporarily shut down, Eldorado Resorts’ main source of income has been halted. The hotel and casino entertainment company’s market cap has plunged 76%.
- Six Flags: Due to COVID-19, large numbers of public gatherings have been prohibited. It has forced the theme park operator to limit its customers, reducing its market cap by 66%.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: