Assessing Impacts of News on Stock Market

  8 min 47 sec to read
Assessing Impacts of News on Stock Market

BY Dwaipayan Regmi

Stock values are highly susceptible to news, with increases often tied to positive developments and declines triggered by negative events. The type of news and the market's current state both play a role, albeit to varying degrees. Timing is crucial when releasing news because the impact is generally more immediate during trading hours compared to after-hours announcements. However, the impact of news can persist, particularly when it pertains to long-term fundamentals.

News perception can vary among individuals. Divergent responses in the stock market can arise from different investor interpretations of the same information. This may result in short-term volatility, making it challenging to predict how news will affect stock values. News not only influences stock prices but also shapes market sentiment. For example, news suggesting a robust economy or a promising business future can instil confidence in investors and drive up stock prices. Trading tactics that use news as a signal can amplify its effects, as some traders base their investment decisions on news which would increase trading activity and cause further price movements. The impact of news on the stock market is complex and multifaceted. Market reactions to news can vary significantly as impacts depend on how the information is interpreted and when it is released.

Specifically, the dissemination of news through the media can exert a significant influence on stock values. For instance, revelations of a company's scandal can lead investors to adopt a negative outlook which can prompt the sale of securities and consequently drive down the stock price. Furthermore, investors tend to make similar investment decisions as their peers, as per the herd effect theory, which makes the change in stock prices more obvious. Given the frequent updates in stock market news, investors are exposed to various types of information that can evoke emotional responses. These emotional reactions can, in turn, sway investment decisions.

Sources of News

International news portals such as Bloomberg, Reuters, CNBC, and Yahoo Finance are some of the news sources for investors. Likewise, business newspapers and magazines, including Forbes, Financial Times, and The Wall Street Journal, are also popular among investors. Whether it is regulatory filings, analyst reports, or press releases, these publications contribute to the global news landscape. However, in the context of Nepal, the following are fundamental sources of news for investors:

Positive news, such as robust earnings reports, the introduction of new products, or successful mergers and acquisitions, can drive up a company's stock price.

Organization's News: Financial disclosures published every quarter exert a substantial influence on investors. Traders are keenly interested in the current status of orders, trending goods, and evolving market trends. Published quarterly, semi-annually, or annually, financial reports and balance sheets constitute a major form of news that can shape investment patterns for investors.

Gossip: Reports on business news often delve into whether a company's sales or revenues meet or fall short of a "whisper number". In both Wall Street and Nepal's stock market, professionals exchange rumours in the absence of concrete information. Some of this information is reliable and others are not. Nepal's stock market, in particular, is significantly impacted by gossip emanating from platforms ranging from Clubhouse to Facebook.

News Portals: Numerous dedicated online news portals exclusively cover the stock market today. These portals play a crucial role in shaping investor perceptions. They are widely accepted as authentic sources of news.

Government Reports: Economic Survey, reports of the central bank, and the government's monetary and fiscal reports serve as benchmarks for both consumer and economic health of the country. These reports heavily influence spending decisions. The decisions to invest or withdraw from the stock market are also dependent on these reports. Government reports stand as a primary source of news for trading in Nepal's stock market.

Impact of Good News and Bad News

People typically sell securities in response to bad news. The prices of many equities experience a decline due to selling pressure triggered by unfavourable news, such as a weak earnings report, breaches in corporate governance, generalised economic and political uncertainty, and unfortunate events. Conversely, people tend to purchase securities when positive news emerges. Factors such as positive economic indicators, favourable earnings reports, the introduction of new products, corporate acquisitions, and increased buying pressure all contribute to the upward movement of stock values.

Then there is the element of unforeseen news. Events like a substantial car recall over safety concerns, a Middle East conflict leading to increased oil costs, or an extended drought devastating crops are examples of occurrences that are nearly impossible to predict. Although traders believe they factor in risks, unforeseen circumstances can disrupt the market. This means that what truly influences prices is unexpected news, not just any routine information. The occurrence of such news was evident during times like the COVID pandemic and earthquakes which brought some unexpected changes to the stock market.

News Impacting Stock Market

In light of the global financial crisis in 2008 and the turmoil in China's stock market in 2019, rational decision-makers would anticipate diverse effects as history has demonstrated. News wields considerable influence over the financial market. Positive news, such as robust earnings reports, the introduction of new products, or successful mergers and acquisitions, can drive up a company's stock price. Conversely, adverse news, such as declining sales, legal issues, or regulatory challenges, can lead to a decrease in prices of securities. 

Developments in geopolitics and the global economy can also impact the stock market. News pertaining to inflation, interest rates, or changes in legislative policies can affect the market as a whole. The key news categories that can significantly influence the financial market include:

Performance of the Business: News about a company's performance, such as earnings reports or management changes etc, can have a direct impact on share prices.

Economic Indicators: News related to economic indicators, such as interest rates, inflation, or unemployment, can impact both the overall market and specific businesses or sectors.

Political Developments: Information about political developments, including governmental regulations or global trade agreements, may affect specific businesses or sectors.

Natural Disasters: News regarding disasters or unforeseen events can disrupt supply chains, production, or demand, impacting specific businesses or sectors.

Mergers and Acquisitions: News about mergers and acquisitions can impact the stock values of both acquiring and acquired companies.

Market Sentiment: News can influence investors' general attitudes or sentiments, affecting their buying or selling decisions.

Rumours and Speculation: Even rumours or speculation can impact the stock market as investors may react to potential future events.

News Impacting Investor's Mindset

News exerts a direct influence on short-term stock price movements. Additionally, news shapes the mindset of investors and impacts various aspects of their decision-making process. Here's how investors' mindsets can be affected:

Market Sentiment: News has the power to influence market sentiment. Positive news can boost investor optimism and spur buying activity, while negative news may instil caution or even fear, leading to increased selling activity.

Investment Decision: News plays a pivotal role in shaping an investor's financial choices. Positive developments, such as favourable news about a specific business or sector, may prompt investors to make investment decisions in that direction. Conversely, unfavourable news can lead to divestment or avoidance of certain sectors.

Risk Perception: News has a direct impact on how investors perceive risk, according to risk management experts. For instance, news about significant geopolitical events, such as a trade war or political unrest, can be perceived as increasing market risk. Investors may adjust their strategies in response to such news.

Risk Volatility: Market turbulence, at times, stems from news events. Volatility, measured by the magnitude and frequency of price changes, can be influenced by unexpected news. Events like natural catastrophes or abrupt shifts in government policy can result in substantial price movements.

News has the potential to exert various psychological effects on investors, influencing market sentiment, financial decisions, risk perception, volatility, and long-term perspectives.

Long-term Perspective: News can shape an investor's long-term outlook. Positive news related to demographic changes or technological advancements, for example, can foster optimism about the long-term prospects of specific businesses or sectors. This positive outlook may encourage investors to maintain their investments in the market even during periods of short-term volatility.

News has the potential to exert various psychological effects on investors, influencing market sentiment, financial decisions, risk perception, volatility, and long-term perspectives. While investors need to stay informed about current events, exercising restraint and avoiding impulsive reactions to transient events is crucial. The stock market and its participants are significantly influenced by news, especially with the pervasive impact of social media and news stories on stock prices. The duration and impact of news on a specific stock correlate directly with the level of interest and visibility of the news stories. Additionally, social media plays a substantial but not fully understood role in shaping perceptions of businesses and equities. As observed with the success of stocks like Unilever Nepal or Bottlers Nepal, we may see a rise in the ability of small investors to band together and help one another. 

Overall, news shapes stock market trends, with positive news stories fostering upward trends and negative news stories leading to downturns. The key determining factors for the extent of news and social media impact on stock market investors are the duration and visibility of the news. In challenging times, it's essential to remember the wisdom of Henry Ford: "An airplane lifts off against the wind, not with it." 

There is a need for further exploration into the specific channels, such as social media or television news, and information-related factors that yield the greatest variations in investor behaviour. These factors could range from mergers, sales, layoffs, or year-end filings. Future studies in this area may equip investors with the insights necessary to comprehend how news influences stocks and guide their actions in response to such events. 

(Regmi is a deputy manager at Rastriya Banijya Bank Ltd)

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