Capitulation is the act of surrendering or giving up. In financial market trading, the term indicates when investors and traders have decided to stop trying to recapture lost gains or maintain their positions, due to falling or rising prices.
Capitulation is always a possibility in financial markets – it often happens during high-volume trading and extended declines for stocks. A market correction or bear market may result in capitulation, which can be caused by investors panic selling in response due to the market event.
Investors might not have the available margin or leverage to maintain their positions during these times, even if they have faith their positions will eventually reap rewards over the long term.
Many market participants consider wholesale investor capitulation to be a sign of a bottom in a market, and therefore, it could also be an appropriate time to enter. However, the magnitude of a capitulation can only be judged with hindsight, not during the event.