The economy and related themes have been a major message woven into news & media reporting throughout the past year. With an average of over 40 million viewers every day, television news has a broad reach. With such a critical message and such a huge audience, it should be no surprise that the media has an impact on investors choices in the buying and selling stocks each day. This article exposes some of the little-known facts regarding the impact the media has on investor decisions and what they can do about it.
Following are six examples of ways in which news & media influence stock market investing.
1. Specific Referrals: Specific references from news & media sources to a company or stock symbol have considerable impact on investment activity associated with that stock. Furthermore, the response is quick. Within a matter of minutes, a stock price can begin to rise, if the media reference is positive, or it can begin to fall, if the media reference is negative.
2. Negative Impacts: Often, a specific referral within the news & media can impact stocks from other companies within the same sector or industry group as the referenced stock. Unfortunately, there are times when the referral results in inappropriate consequences.For example, a negative news reference to Stock #1 drives down the price of Stock #1. Stock #2 is in the same industry group as Stock #1 and the price of Stock #2 drops as well. It is highly likely that investors holding either Stock #1 as well as investors holding Stock #2 will both quickly sell their stock to capture any accrued gains or to limit their loss.Unfortunately, the negative news reference for Stock #1 may not be relevant to Stock #2. If this is the case, there is no legitimate reason for the price of Stock #2 to drop. Investors with knowledge of the company associated with Stock #2, often see this as an opportunity to quickly buy additional shares of Stock #2 to take advantage of the lower price.Generally, the market will quickly wake up to the unintentional negative impact and the price of Stock #2 will begin to rise back to its previous level. Knowledgeable investors are happy since they bought at a lower price. Those existing investors that sold Stock #2 are unhappy because they reacted to a falling stock price and now recognize that Stock #2 should not have dropped in price under these circumstances.
3. Overriding News: As pointed out earlier, stock prices respond quickly to news specific to a company. However, news reported later in the same day or week, can often override the earlier company specific news. The initial news may have caused a stock price to begin to rise, only to see a change in the direction of the price when the latter news report was released. In most cases, investors cannot anticipate this situation and its consequences are unfortunate, but real.
4. Who Can I Believe?: News & media sources often make extensive use of "guest experts" that are generally well-informed about some aspect of the economy or stock market. This is a positive element in their newscasts. However, listening to these experts demonstrates that even the experts seldom are in 100% agreement on the issue at hand. Most investors are looking for answers and may be frustrated by the lack of definitive answers to their questions. Although this may be a turn-off to some investors, it makes a positive contribution to the industry as a whole as it does provide investors with more pieces to the puzzle on the path to a better understanding of the "big picture".
5. Do Not Run With The Bulls: News & Media reporting can produce a response that demonstrates "herd mentality". Such a reaction is generally not based on sound investment principles but on the opinion of a group or individual that can start the bulls running.Over time investors tend to gain confidence in stock recommendations offered by a television financial personality or the editor of a financial newsletter. When this "leader of the bulls" makes a buy recommendation on a specific stock, generally after the market close of that trading day, the herd quickly responds by placing a buy order for that stock. When the market opens the next day, this large number of buy orders can cause the stock price to quickly surge or gap up and many of those buy orders get filled at prices considerably higher than the previous days closing price. When other investors see that stock price rising, they want to get in on the action and they place orders further driving up the price of the stock. Often, this inflated stock price is temporary and the price of the stock returns to more appropriate levels leaving some of the herd in a loss position.The best advice is "do not run with the bulls". Wait to see what the price does over the coming week and then make a decision based on your own fundamental and technical analysis of that stock.
6. Watch Out For Old News: Many stock market traders fail to recognize the impact of institutional investors. Wikipedia defines institutional investors as "organizations that pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others." Examples of institutional investors are banks, insurance companies, brokerages, pension funds, mutual funds, investment banking, and hedge funds.Institutional investors have the benefit of internal professional staff that specialize in studying the pros and cons of a company in order to determine whether that institution should buy that company stock. The media is not aware of the work of these professionals, nor the investment activity of the institution, until after the fact once the price may have been driven up. At that time, the media may unknowingly report the "old news" of the price rise. This report can cause the public to begin to buy that stock further driving up the price. This can result in artificially high prices that will eventually drop back down after the old news is no longer being reported.Watch for technical indicators that provide indication of institutional activity. Make an informed decision. Do not respond to old news.
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