What it is:
A sell-off is the rapid selling of a security leading to a sharp decline in its price.
How it works (Example):
When a substantial number of shareholders sell a specific stock, it is called a sell-off. Generally speaking, prospective buyers sit on the sidelines until the conditions that caused the sell-off to occur are over. So because there are few buyers and many sellers, the stock price declines, sometimes dramatically.
A sell-off may be caused by an event within the company, like a report of lower than expected earnings. A sell-off can also be caused by external forces. For example, a spike in grain prices may trigger a sell-off in food stocks because of the increases in raw materials costs.
Why it Matters:
Sell-offs are important market events. Savvy investors should try to sell a security well before a dramatic sell-off so as not to be the last one holding the stock. At the same time, investors can take advantage of sell-offs, especially broad market sell-offs, to buy fundamentally goods stocks at very affordable prices.