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