Newcomers to share market investing are often surprised to see the prices of their stock picks drop in response to what appears to be “good” news. A company reports blockbuster earnings and the share price drops. How can this be? Shouldn’t good news send stock prices up and bad news send stock prices down?

What Really Moves Stock Prices?

The straight answer to the question is the law of supply and demand. When investor demand for a stock is high, existing shareholders of the stock can ask for high prices. If enough investors are willing to pay the higher price, the share price rises. If demand is low, existing shareholders must be willing to sell at lower prices, driving down the price as long as there are enough investors looking for bargains.

The real question, then, is this: What is it that impacts demand? The answer? Investor sentiment. Investor perception of a stock’s future potential is what drives demand, even though that perception is sometimes at odds with reality. News and “potential” news—or rumors—is often a critical driver of investor sentiment.

The law of supply and demand has a strong impact on price movement, and investor sentiment is what drives demand.

Buy the Rumor, Sell the News

In many instances, newsworthy events are anticipated, often taking the form of rumors. For big-name stocks there is always a great deal of speculation prior to an official earnings release. The same can be said about a new product launch. What happens then is that investor sentiment turns positive or negative about the newsworthy event before it actually becomes reality. The upturn or downturn is “priced in” before the news is released. Investors and traders with a shorter-term horizon then take advantage of the price appreciation and begin selling to take profits, thus driving down the price.

Rumors can have a strong impact on market prices, and traders sometimes find that an upturn or downturn is “priced in” before the news is released.

While “Buy the Rumor, Sell the News” has become gospel truth for some investors and traders, there are other ways to take advantage of market news.

Strategies for Using the News for Trading and Investing

Every investor needs a list of prospective stocks, or a watch list. This is true regardless of whether you prefer long-term investing or short-term momentum trading. News, potential news, and even rumors about the stocks on your list can be the key to a successful Buy or Sell decision. You should spend some time scouring Tradingfo´s news section and other financial sources to find out what is going on with your prospects. Here are six critical areas to stay current about:

1. Business conditions in the company’s market sector.

2. New products, projects, contracts, or customers that the company is pursuing.

3. Share price performance going back three to six months.

4. Speculation that the company could be a candidate for merger with another company or acquisition by another company.

5. Analyst commentary and recommendations about the company.

6. Articles on financial news sites like Tradingfo, The Wall Street Journal, or Bloomberg.

Spend time researching potential stocks to create a portfolio or watch list

The first strategy then is to continually monitor the six key areas for each of the stocks on your watch list, or in your existing portfolio. This helps you to make informed Buy, Sell, or Add decisions.

Despite some of the high-minded rhetoric you may have read about investing, it all really comes down to making educated decisions. When you buy a stock, you’re expecting the share price to go up, leaving you with a financial reward. You can also take advantage when the share price goes down by short-selling the stock. Your analysis of company news will not only point out potential winners, but also potential losers. Shorting stocks you are convinced will drop can be profitable, but it’s a high-risk strategy. Regardless of whether you short or long sell, educating yourself by way of a thorough analysis of news increases your odds of a winning trade.

Continually monitor six key areas for each of the stocks in your portfolio in order to make educated decisions about whether the share prices will rise or fall.

The second strategy is to use the news to develop a watch list or to help you make short-term buying decisions. Most of the better traders include market data analysis—they look over a list of the top-% gainers and losers for the day. In many cases, when you click the symbol for a stock that has made a large percentage move up or down, you’ll find some kind of news that triggered the move. Some research has shown that stocks moving upward continue to gain. Depending on the nature of the news, stocks that have dropped substantially may be bargains worthy of consideration.

Use daily news announcements to create a watch list or to help you make short-term buying decisions.

Bottom Line

Regardless of how you use the news, always be aware that not all news is objective and some new outlets may be deliberately manipulative. The digital information explosion is a wonderful thing, but it has allowed a level of public access to business dealings that was unheard of in previous decades. As a result, there are those in the market who put out “news” with the intent to influence investor sentiment enough to manipulate the stock price up or down. Double check the validity of your information, and keep your sources diverse.

Summary:

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The law of supply and demand has a strong impact on price movement, and investor sentiment is what drives demand.

 

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Rumors can have a strong impact on market prices, and traders sometimes find that an upturn or downturn is “priced in” before the news is released.

 

P

Spend time researching potential stocks to create a portfolio or watch list

 

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Continually monitor six key areas for each of the stocks in your portfolio in order to make educated decisions about whether the share prices will rise or fall.

 

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Use daily news announcements to create a watch list or to help you make short-term buying decisions.

 

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