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Hammering

Reviewed by Sujaini | Updated on Oct 05, 2020

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What is Hammering?

Hammering is the act of rapid and concentrated selling by speculators of a stock perceived to be overvalued.

Breaking Down Hammering

Business hammering is due to large sales orders or lots of small sell orders. In some cases, investors can collaborate on orders with a view to pushing down the share price. Market hammering usually takes place on unforeseen bad news, also known as an asteroid case, such as a terrorist attack.

Hammering may result from an event involving an asteroid. Asteroid events are a form of danger to events that catch firms unprepared. For example, if a public company depends on a single executive/board member or sales of one or a few goods, then a sudden departure or disturbance to the market may reduce sales and stock price.

Small pharmaceutical or biotechnology companies may experience asteroid events based on clinical trial progress, FDA approval, and product sales of a single drug. Certain future events involving asteroids include restructuring, mergers and acquisitions, bankruptcy, spin-offs, or takeovers.

Institutional investors can try to take advantage of an asteroid occurrence by perceiving it as a temporary stock mispricing. Such a strategy leverages a stock price propensity to decrease owing to a sudden or dramatic change. Stock analysts analyse factors like the regulatory environment and potential synergies or gains from the changes and set a new stock price target.

Based on the current stock price and the price objective, an investment decision would be made. The right decision could lead to profitable trading; an incorrect decision could lead to losses.

For instance, if an asteroid event such as a hostile takeover happens, the company's stock price will likely fall. Research analysts plan to predict whether the transaction will take place and its effects and duration, as well as the impact on earnings and stock price.

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