Effect of Current News on Stock Trading




Effect of Current News on Stock Trading

International news is a significant factor that has a massive effect on stock prices. Regardless of the nature and duration of the investment, all of the stakeholders involved in stock trading have to examine news headlines occasionally. There are countless sources of news each generated by stakeholders with different agendas. Every investor needs to be intelligent enough to interpret the news and quickly deduce whether it has an effect on the stocks. It is also necessary to determine the extent of the damage created by the news. The paper will concentrate on the stock markets within the United States, United Kingdom and Australia. Discussing the effect that international news has on the behavior of the stock markets as far as investment is concerned will reveal a better understanding of the external factors and their effect on the economy.

It is imperative to note that news is categorized into two: positive or negative. News classified as positive has a tendency of creating an optimistic impact on stock markets. It is evident that share prices soar immediately after the news is revealed to the public. Positive news for instance, a major agreement, acquiring new assets, realization of annual profits all have the similar effect of increasing the value of a stock (Xinsheng, Ying, and Mingting 76). Stock prices have a slow reaction to positive news. The only benefit is that this reaction is steady. An interesting occurrence is that in unique cases, good newsis not a direct assurancethat the stock market will improve. In unique situations, the positive newswill result in a substantial dropin stock prices (Xinsheng et al. 45).This is mostly caused bythe assumption that unofficial news, rumors and speculations have an equally critical impact on stock marketscompared to public news.

The stock market frequently predicts emerging stories and adjusts their expectations in view of that. When stakeholders confirm these expectations by accessing tangible investment news, a provisional price drop will be registered. Certainly, the reverse is also true (Ellis and Lewis 54). If the suspicions concerning a specific stock failed to be confirmed as valid, investors may react in unexpected ways. One of the reactions can actually be a beneficial one that sees an increase in stock prices. This is why it is important to monitor the financial news across different media and observe the effects of headlines on stock quotes (Xinsheng et al. 22). The effects of financial news have the capacity to cross borders. Positive good news at the local level and negative news overseas can unfavorably lower the prices of stock. The international environment is closely integrated within the domestic market. Occasionally, a simple case of bad financial news from overseas can create a temporary depression within the market. It is obvious that negative news is far more influential on stock prices and investor attitudes compared to positive news. Most of the average investors are discouraged from acquiring new stocks (Chan 26). Market sentiment is an equally significant factor. The emotions of the different investors have a massive effect on the volatility of the market and consequently, the prices of the affected stocks.

This section evaluates the way in which most of the stakeholders in U.S. stock markets react to economic or political news. Generally, it has been discovered news releases in the nation create a fast yet short-lived increase in volatility. Most of the panics dissipate after the initial minute. For instance, the U.S. fixed income markets has been volatile because of the vast amount of information within macroeconomic entities including human resource data and inflation reports (Xinsheng et al. 17). The most recent adjustment to these changes lasted approximately 40 seconds. The rate of the American stock market’s reaction to fresh information is equally startling. An analysis of the trading trends in NASDAQ revealed that both traders and investors were very wary of the new information. Behavior during trade openings was mostly relaxed while any announcements made during trading hours created automatic reactions quickly. The situation was the same for NYSE stocks (Chan 19). It is easy to conclude that the American stock markets are highly effective in processing new information and translating it into valuations.

One of the most recent negative news that has had a massive effect on the economic stability of the United States is the recent decision by Britain to leave the European Union. Britain’s choice to exit Europe created a general depression in global markets. Most investors were surprised by this global economic realignment and opted to categorize it as dangerous and ambiguous. It was rather expected that most decided to withdraw their investments from riskier vehicles, stock markets being the riskiest (Xinsheng et al. 74). While the decision was made by one country, its impact has affected the economies in different continents across the world. Locally, ‘Brexit’ has resulted in losses as most international investors pulled out of British companies. This particular phenomenon has caused significant problems because it is the first time such an event has occurred globally. This high level of uncertainness creates fear that is manifested through a noticeable drop in stock performance as far as China and Singapore. Interestingly, the Brexit phenomenon was good news for the United States and Japan that witnessed an increased number of investors seeking refuge and new investment areas. The speed of reaction within the U.K. market popularly known as FTSE revealed that that new information was processed and incorporated into the financial decisions within approximately 75-90 seconds (Ormos, and Vázsonyi 34). This is an equally high rate of data reception and analysis. British fixed income markets also responded within the same time bracket. It is apparent that the U.K. markets mimic the efficiency found in U.S. markets.

The analysis of the Australianfinancial environment also revealed useful information concerning the power of news in the economy. Xinsheng, Zhou, and Kou in their article, “The Impact of Monetary Policy Surprises on Australian Financial Futures Markets. This research analyzedhow the Australian financial markets reacted to news particularly within the 2008-2010 periods. Their findings indicate that most of Australia’s markets reacted to major macroeconomic events rather than minor events. However, they also recorded an impressive 30-second reaction time to major global news (Xinsheng et al. 32). There was a significant amount of volatility on the days that major financial announcements were being made. During these periods, the number of bid-ask spreads was unusual. The period after the 30-seconds reactions was followed by heightened price volatility. However¸ price reversal was also evident a short while after the changes occurred. This is despite the absence of any form of information leakage in the market.

Works Cited

Chan, Wesley S. Stock Price Reaction to News and No-News: Drift and Reversal after Headlines. Yale University. 2001. Print.

Ellis, Luci and Eleanor, Lewis. The response of financial markets in Australia and New Zealand to news about the Asian crisis. Reserve Bank of Australia. 2003. Print.

Ormos, Mihály and Miklós Vázsonyi. Impacts of Public News on Stock Market Prices: Evidence from S&P 500. Interdisciplinary Journal of Research in Business. 2011. Print.

Xinsheng Lu, Ying Zhou, and Mingting Kou. The Impact of Monetary Policy Surprises on Australian Financial Futures Markets. Auckland University of Technology. 2013. Print.

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