Panic Buying

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21 Aug, 2024

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Panic Buying Meaning

The term "panic buying" refers to the phenomena of mass purchase that often occurs either just before or immediately after calamity or some unexpected event - regardless of whether the crisis is actual or simply projected to occur.

There is also the possibility of panic purchasing happening in the stock markets. When the price of a security, such as a specific stock or commodity, experiences a sharp and prolonged rise in price, many buyers rush to invest in it. This is because they fear they will miss out on a chance to make a significant profit.

Panic Buying Meaning

"Panic purchasing" is characterized by a sudden rise in the volume of purchases made, which in most cases leads to an increase in the cost of a product or security.
The classic sign of panic buying in the stock markets is an increase in volume, with the vast majority of traders looking to acquire positions. This is made worse by traders' concerns that they will lose out on opportunities and by short squeezes.
Customers in an economy may also engage in panic buying if they are concerned that high inflation would reduce the purchasing power of their money. As a result, these individuals may make unnecessary purchases, which drives prices even higher.

Panic Buying Explained

"Panic purchasing" implies that people are being driven by fear or anticipation of occurence of unusual event. It is characterized by a sudden rise in the number of purchases made, leading to a significant increase in the price of a product or security.

In the financial markets, an indication of panic buying may often be an increased volume. It points towards investors looking to acquire holdings. For example, when a stock reaches a support zone and demonstrates strong signs of a comeback, there is a possibility that panic purchasing may occur for that security.

A particular stock is actively watched by a large number of people. When it is selling at a low price, this may generate a significant level of demand for security. In addition, when unexpectedly favorable news about a business is disclosed, which has the potential to positively affect both its value and trading price, this can also lead to panic purchasing in the firm's stock.

The trading processes of the market are an essential component that plays a role in determining the daily price changes of shares. Because they are constantly traded on the secondary market, securities are susceptible to being rapidly impacted whenever there is a case of panic purchasing. Market makers bring buyers and sellers together in the trading market.

When market makers are faced with a large demand for a stock that has a limited supply, it is possible for them to quickly raise the asking price, which then drives the price slowly upward. When there is panic buying on the open market, the market mechanisms that are in place to facilitate trades will almost always cause prices to rise. This is the case regardless of whether fundamental or technical considerations caused the panic buying.

Examples

Let us have a look at the examples of panic buying to understand the concept better.

Example #1

An article posted on the website of the World Bank highlights the phenomenon of "panic purchasing". It explains the effect on the supply chains of healthcare throughout the world during the recent Corona pandemic. This article exemplifies how panic buying during the pandemic caused a collapse in the market.

It was primarily characterized by excessive demand and inadequate supply. It is now considered a "seller's market," meaning that suppliers and distributors have imposed new terms and conditions on purchasers. Even considering the macro scenario, the article claims that the problem of restricted supply is made worse by panic purchasing in high-income nations, which further restricts low- and middle-income countries access to inexpensive and quality-assured medications.

Example #2

Let us consider that the share price of company X, a famous pharmaceutical company, starts falling. As the company has strong fundamentals and is leading in the pharma industry, many investors are tracking its share price. Thus in the dip, when share prices fall, traders start buying the stock believing that the share prices will soar soon and they will earn good returns on investments.

Such panic buying induced by fear of missing out on results is substantial demand for the stock. This further increases the share price, and even the cautious and risk-averse traders spot the trend reversal and enter buying positions which fuels panic buying until the bubble bursts.

Effects On Economy

An economy may experience a period of panic purchasing for various causes. Each of these may have a distinct influence on the economy and the monetary policy support it receives. For example, demand for a brand-new product that people are interested in may be driving a high amount of purchases. A strong demand such as this can benefit the economy, but it can also lead to an increase in prices.

On the other hand, under some economic circumstances, panic purchasing may be caused by an abnormally limited supply. It can cause an increase in price while simultaneously causing a movement toward new alternatives. This can have a negative impact on the economy. In addition, some cases of panic purchasing may only last for a limited period. Like when there is a surge in demand for commodities due to adverse weather conditions.

How To Avoid Panic Buying?

Taking a step back and looking at the big picture helps with panic buying. Market corrections and bear markets are common parts of investing. Over time, the market tends to go up, but not in a straight line. Understanding such corrections helps a trader avoid panic buy by reducing the fear of missing out.
Financial crisis of 2008 taught traders multiple things. First, life goes on, markets recover, and people who try to guess when volatile markets will go up or down usually lose money. not worrying and looking for investment opportunities when the market is down is advised.
Get the Relaxation Response going. The relaxation response, which is the opposite of the fight-or-flight response, is a good way to fight it.

Panic Buying And Hoarding

The behavior known as hoarding is classified as a disorder. Buying in panic is a common reaction to unexpected events, such as a sharp rise in stock prices.
Buying and storing excessive quantities of any product for later use is the definition of hoarding. Buying in a panic is doing so to gain a financial advantage.
In times of uncertainty, hoarding items for one's own use is possible, but panic buying is prompted by a fear of losing out financially on opportunities. However, hoarding can serve a personal purpose.

Frequently Asked Questions (FAQs)

What is panic buying?

The practice of purchasing huge quantities of a certain product or commodity out of sudden concern about an impending shortage or price increase. When a stock reaches a support zone and exhibits strong signs of recovery, there is a chance that panic buying may develop for that investment.

How to avoid panic buying?

The five steps to avoiding panic purchasing are as follows: address the anxiety, fight the FOMO, stick to a budget, take 24 hours time before reacting, look for different means of expression.

What causes panic buying?

There are several potential reasons for frantic spending. Previous research has shed light on many important concepts that have been shown to be associated with panic purchasing. These concepts include uncertainty, dread, and worry; a lack of confidence; the sense of the crisis; social situations and conformity; a method of coping; and a means of obtaining control.