The myth
“Trading the news” is a popular investing strategy. This involves buying or selling assets, including stocks, based on how you think they will be affected by a certain bit of news.
Stock prices are particularly sensitive to investors’ reaction to news. Some traders try to take advantage of this price volatility by tracking the news to get clues on which stocks to buy or sell.
Is chasing news really effective for investing? Find out more below.
The reality
The news itself does not directly change stock prices. However, certain news influences supply and demand. Bad news often prompts investors to sell while good news typically leads people to buy.
For example, if a company exceeds its targets in its quarterly earnings report, the demand for its shares might increase. Investors may also be prompted to sell their shares if the company falls short of expectations.
Not all types of news have the same effect on demand. Some only affect a particular company, while others can impact industries or entire markets.
What’s bad news for some companies or industries can be good for others. One company’s closure could mean its competitor’s gain.
To successfully trade the news, you’ll need to have a good understanding of how investors might react to these different kinds of developments.
Risks of believing this myth
Trading the news doesn’t only require access to relevant news, but also the ability to properly execute according to what the news signals. Investors need to stay informed and always be ready to act.
This can be difficult if you don’t have enough time to monitor the news and adjust as needed. Here are other challenges you might face when chasing the news:
- Knee-jerk reactions
When you’re glued to the news, there is a tendency to feel a “fear of missing out” (or FOMO, as you may know it). You might end up reacting prematurely and making decisions that do not align with your investing goals.
- Emotional investing
News cycles are almost never-ending in the digital age. It’s easy to get carried away and fall into emotional investing if you don’t take the time to identify which bits of information actually matter.
- Short-term thinking
Some types of news do not have a long-term effect. While short-term trading can be profitable for some, it requires a lot of skill and time.
Instead of simply following the news, experienced investors try to anticipate it to increase their chances of buying low and selling high.
This strategy may not be suitable if you’re a beginner, investing for the long-term, or if you prefer a more passive approach.
Verdict: Partly true.
For an investing strategy to work, it needs to align with your goals and the type of investor you are. Following the news is important to stay informed, but that doesn’t mean you should always act immediately (or at all).
It helps to declutter your newsfeed. Make sure you only follow legitimate, relevant, and trustworthy sources to avoid unnecessary information.
Consider other factors before deciding to buy or sell. These include a company’s fundamentals and how an investment will fit into your portfolio.
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