Why you should buy a rumour and sell on news?
Stock prices climb when there is an expectation of good news and when the good news arrive, there is a sell off that follows. When there is an expectation of bad news, the stock prices typically fall, and when the news hit the markets, stocks actually go up.
This happens due to market participants response to expectations - rumours. When there is an expectation build up in the market, the market participants accordingly take their positions. For example, if a company is going to announce a blockbuster project- the traders typically start purchasing the stock from the market much ahead of the actual announcement. This pushes the stock price upwards. Many a time the stock price surges to an extent that the best possible outcome of the project, in terms of possible upside in earnings, is already factored in the stock price.
In such a scenario the traders prefer to offload the stock to the investors who are willing to hold on to the stock for long term to benefit from the improvement in business prospects of the company. The company needs some time to execute the project and the earnings are expected to take some time to materialize. Also there are execution risks associated with projects. Most traders prefer to pass on this risk to the new buyers of the stock and offload their position in a short while. Position built over a period of time, when offloaded in a short time, typically leads to a fall in stock prices.
If the news expected is not the same as expectation - to be precise if the actual project announced is far smaller than what was envisaged, there is a sell-off by traders and the stock prices correct.
Happy Investing
Stock prices climb when there is an expectation of good news and when the good news arrive, there is a sell off that follows. When there is an expectation of bad news, the stock prices typically fall, and when the news hit the markets, stocks actually go up.
This happens due to market participants response to expectations - rumours. When there is an expectation build up in the market, the market participants accordingly take their positions. For example, if a company is going to announce a blockbuster project- the traders typically start purchasing the stock from the market much ahead of the actual announcement. This pushes the stock price upwards. Many a time the stock price surges to an extent that the best possible outcome of the project, in terms of possible upside in earnings, is already factored in the stock price.
In such a scenario the traders prefer to offload the stock to the investors who are willing to hold on to the stock for long term to benefit from the improvement in business prospects of the company. The company needs some time to execute the project and the earnings are expected to take some time to materialize. Also there are execution risks associated with projects. Most traders prefer to pass on this risk to the new buyers of the stock and offload their position in a short while. Position built over a period of time, when offloaded in a short time, typically leads to a fall in stock prices.
If the news expected is not the same as expectation - to be precise if the actual project announced is far smaller than what was envisaged, there is a sell-off by traders and the stock prices correct.
Happy Investing
Source:Moneycontrol.com
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