When it comes to investing in the stock market, investors always focus on trying to buy low and sell high and make a profit over the long term. This involves doing research in figuring out which stocks they want to buy and ensuring they buy them at the right price. But even when they do all the research and find a great buying opportunity, external factors can always send the value of a stock down substantially.

The Effects of News Coverage

Most often, the major culprit for a stock price having volatility is tied to news coverage of the companies’ activities. Whether it’s a one-time incident from bad publicity or an announcement of a new product or initiative, a lot of investors tend to react heavily to the news regarding a company. The reason is that investors know that being early rather than late is the secret to optimizing returns, and processing information the fastest enables them to take advantage of what direction the price is going to go based on that news.

Buy the Rumor, Sell the News

A lot of times, when good news is anticipated to come out, investors do what’s called buy the rumor, sell the news. When a company is preparing to announce something overwhelmingly positive, there is usually some insider information that leaks. This gives news analysts speculation and enables them to put out news articles about what might be happening. Because this is the first time any investor hears of this news, rather than wait for confirmation, they assess the probability the rumor comes to fruition and buy up shares, sending the stock price soaring.

Modification of a Price Target

After the official news comes out, most of the heavy investors have already bought into the price and decide to wait for one more initial surge before they sell and take profits. For example, an e-commerce company called Alibaba has received a lot of news coverage regarding economic controls by the Chinese governments, which has forced many analysts to modify the BABA price target.

What About Unanticipated News?

News is important because, in a way, it is not really tied to a companies’ fundamentals. In other words, when analysts do coverage on a stock, they assess their thesis and what they build into their price based on that thesis, thus creating a price target. However, when unanticipated news comes out, whether good or bad, it forces analysts to revisit their thesis, to determine whether the new news the company has provided should adjust their price target for the company.

Be Prepared to Reexamine the Research

It’s important that even if you’re not an analyst, that you follow the company and the news that comes out to determine if you need to reexamine the research you have for the company you’ve invested in. While some news you may have anticipated, you also don’t know how other investors may react to similar news. Therefore, you need to be prepared to see the value in your positions change based on these news reports.

Do You Need to Adjust Your Position?

When news comes out and your assessment is different from others, based on how the stock price is reacting, it may create a golden opportunity for you to adjust your position. For example, if you find news to be neutral or positive such as adding employees, and investors react negatively to it, it may create a golden buy opportunity if you believe the thesis intact. If you are right and investors are wrong, you made a very strong profit when investors who sold out missed the move up.

Alternatively, if you believe either the company has hit its peak or news comes out that you don’t agree with and investors still buy it up, it can create an excellent profit-taking situation for you. While you may have to pay capital gains taxes, you will likely be considered a genius for selling out near the top.

Assess the News Source

It is important that when a stock price moves based on news, that you assess the source. After all, any kind of analysis driven from company news will always be subjective, and it’s important to note the quality of the source, as well as if they have any history of being right or wrong about forecasted price movements. You may find commonly that many analysts will often differ on company thesis, and so it’s important you understand how credible a source is, which can provide insight on whether you stick to your company research.