The Effect of News on Stock Trading

Author: James Clark

The Impact of News on the Stock Market

Reading daily stock news is one of the most important habits of a stock trader. This habit can be the difference between success and failure as traders use it to make practical judgments using public information. The effects of news on stock trading are well-documented.

Stock market news brings you up-to-date on all the latest happenings in the business world, tells you which companies are performing well, and which ones are declining. Stock prices are volatile and fluctuate due to changes in supply and demand. As a result, chasing the news is an important habit that can help you anticipate future events.

The Effects of News on Stock Trading

There are three types of news stock traders typically deal with, and each type has its impact on the stock market:

1. Good News

Good news generally presents an opportunity for traders to buy stocks. It can include the announcement of a new product, positive economic indicators, corporate mergers or acquisitions, or a positive announcement, etc. All this can easily translate into greater buying pressure and increase stock prices.

2. Bad News

On the flip side, bad news generally forces traders to sell stocks. Bad news can include macroeconomic and political uncertainty, corporate failure, poor sales, and bad earnings reports. All this can easily translate into selling pressure and lead to a reduction in stock prices. However, bad news can be good news in disguise in some cases.

For instance, COVID-19 caused a decline in movie theater stocks. Meanwhile, the stocks of streaming services, such as Netflix, HBO Max, and Disney+, surged due to an anticipation of an increase in subscriptions during the pandemic.

3. Unexpected News

Unexpected news drives prices in either direction because you cannot anticipate these events. For example, many companies have Cybersecurity measures in place, but an attack is still possible. Similarly, the news of COVID-19 suddenly caused the demand for household essentials to surge.

How to Anticipate the News

Experienced traders spend a lot of their time anticipating the news so they can buy or sell a stock before the news makes the papers. They use different information sources for this purpose, including:

1. Gossip

Many Wall Street professionals use gossip which might or might not contain solid information that can help you anticipate the news. This can include a “whisper number”, or an inside report.

2. Industry News

With the technology we have at our disposal, quarterly reports are a thing of the past for traders. Modern traders are constantly learning about current orders, what products are getting popular, and what is trending these days.

3. Economic Reports

Most traders use the U.S. Census Bureau reports anticipating the prices of durable goods orders, as well as their lagging and leading indicators. Using this information and other government reports, traders can decide how they trade and spend their money.

Bottom Line

The effects of news on stock trading are pretty clear. In the digital era, stock traders need to be aware of the news so they can better position themselves into a trade. Traders use news for two purposes: to take immediate action upon bad news to prevent losses from falling prices or to take advantage of good news to make a profit.

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