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How Stocks Are Reacting to the News?

2012 Mar 23

 

Every long term investor or day trader knows that stock price is reacting to the released news. Of course, day traders do care more about such reaction because long term investors sometimes even not pay attention to news at all, and why should they? News is released very often, and when investor analyses such news, it is usually already too late to react. 

 

So if you ask: how news affects the stock price, the answers might be different. Of course, mostly it depends on the type of news, which can be positive or negative. Naturally, if news is positive stock price will rise, if news is negative, stock price will fall. But the question is how much? It depends on few factors:

 

- Market efficiency, which depends on stock’s liquidity and trading volume

- The influence of the news to the stock value. 

 

Liquidity and trading volume are necessary conditions for stock to react to the news. If there are no trades, of course price won’t change. But if liquidity is normal, then price have to change. Usually, the strongest impact can be made by news that announce about some turnaround in financial results, significant acquisitions or sale of a stake. 

 

Acquisitions and Stock Price

The acquisition of another company does not always create a value. Sometimes, stock price may fall down after announcement about the acquisition. Basically, everything depends on the price of acquisition and potential synergy. If price paid for acquisition is very high, and synergy will not be enough to compensate such overpricing, then stock price should fall. 

 

When acquisition is announced, it is more usual that stocks of the acquired company will rise, of course, if the price of the acquisition per share is higher than previous price on the stock exchange. 

 

 

Read next article: Are Rich People Investing in Real Estate?





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