The Forced Selling Snowball

Q What's "forced selling"? — T.W., Panama City, Fla.

A You'll hear about forced selling these days because the many big drops in the stock market that we've seen recently suggest that it's going on. Plus, once it starts, it tends to snowball.

Imagine that you own shares of a mutual fund, and it has fallen in value by 30 percent, as has happened with some funds lately. In many cases, it's best to just hang on, waiting for a recovery — at least as long as you still have faith in the managers. But many shareholders will bail out, in fear or anger. When they do, the managers have to sell off some of the fund's holdings in order to generate the cash needed for withdrawals. With many funds thus selling lots of stocks, that sends the price of the stocks downward. This then causes more investors to sell, putting further pressure on stocks. Ironically, at a time when many fund managers see bargains galore, they're forced to sell, not buy.

Meanwhile, other investors, big and small, have bought stocks "on margin," meaning with borrowed money. If those stocks fall sharply, they need to put in more money, or sell. And many sell, further exacerbating the problem.

Q Are there some Web sites where I can learn about companies engaging in shenanigans?

— K.N., Greensboro, N.C.

A There sure are. Click over to www. footnoted.org to learn about surprising information buried in financial reports, www.fundalarm.com for mutual fund shenanigans, and www. thecorporatelibrary.com for insights on how well companies govern themselves. Our Fool writers have also been known to uncover some shenanigans — you can check out our recent articles at www.fool.com/foolwatch.

Got a question for the Fool? Send it in — see Write to Us.