Panic Buying: Meaning, Psychology and Implications

What Is Panic Buying?

Panic buying is a type of behavior marked by a rapid increase in purchase volume, typically causing the price of a good or security to increase dramatically.

Understanding Panic Buying

From a macro perspective, panic buying reduces supply and creates higher demand, leading to higher price inflation. On a micro-level (e.g. in investment markets), fear of missing out (FOMO) or buying triggered by a short squeeze can exacerbate panic buying, into a so-called melt-up. Fear of a shortage of the good is another potential reason for panic buying.

Panic buying can be contrasted with panic selling, in which people sell a good in large volumes, driving its price down, usually caused by a fear of a market crash.

Panic buying may result from a number of different events. Generally, panic buying occurs from increased demand which causes an increase in price. Adversely, panic selling has the opposite effect resulting in increased supply and a lower price. Conceptually panic buying and selling on a large scale can have dramatic effects leading to market shifts in various scenarios.

Investment trading and a country’s economic framework provide two settings for broad market effects from panic buying. Both can be important landscapes for following supply, demand, and price inflation. Investment trading will typically see more direct and immediate effects from panic buying. A country’s economic framework will also be influenced by panic buying however it would have less of an immediate impact since it causes price fluctuation in goods which are depleted over a longer amount of time from supply backed by inventory.

Panic Buying and Investing

Panic buying in the financial markets is typically evidenced by a spike in volume with the majority of investors seeking buy positions. Panic buying for a security may occur when a security reaches a support zone and shows strong signals for a rebound. This can create a high interest in the security since it is selling at a low price and actively followed by a broad audience. Panic buying can also occur after unanticipated news about a company has been released that will positively affect its value and trading price.

Market trading mechanisms are a central component influencing the volatility of a security’s daily price. Since securities trade continuously on the secondary market they can easily be immediately affected when panic buying occurs. Market makers match buyers and sellers in the trading market. When market makers have a high demand for a security with a lower supply, it can immediately increase the ask price, pushing the price steadily higher. Regardless of whether panic buying is driven by technical or fundamental factors, the market mechanisms facilitating trades on the open market will generally always see prices move higher when panic buying occurs.

Panic Buying and the Economy

Economists watch prices and price inflation across a wide range of goods and services within an economy. Price inflation is typically one of a few important economic indicators that can provide a reading on economic activity. Generally, prices inflate during growing economies where consumers are actively spending. However, the availability of goods and services can also affect price inflation.

Panic buying in an economy can occur for various reasons, each of which can have different impacts on an economy and its monetary policy support. High volume buying may be driven by demand for a new product that consumers are overwhelmingly interested in. This type of high demand can be good for the economy while also leading to price inflation.

Adversely, in some economic situations, panic buying may be driven by an extremely low supply which can drive up the price and also cause a shift towards new alternatives. Some panic buying situations may also only be for a short term such as high demand for goods related to weather-related conditions which can have their own economic implications.