A rumor, speculation or gossip can either send a stock through the roof or move the stock into negative territory during the trading day. In many instances, stock exchanges, corporate restructuring and quarterly earnings can be bypassed by speculation of an acquisition or rumors of the successful CEO stepping down. So, is finance governed by high class rumours and gossip?
1. Rumors Affect Stocks
One of the most well-known cases of high class rumors and gossip governing finance, transpired earlier this year. In January, reports flooded Wall Street that Samsung had approached the fledgling smartphone maker BlackBerry. This helped shoot the depressed Waterloo, Ontario-based stock up by 29 percent, its biggest gain in a few years.
Late last year into early 2015, there were widespread reports that Yahoo would be merging with AOL. The two tech titans essentially have not been performing like they did prior to the dot-com bubble. A merger was likely and necessary for the two companies to outperform their Silicon Valley rivals. What happened with both stocks? Yahoo and AOL shares once again soared four percent and eight percent, respectively.
See the pattern? When a company is on the cusp of collapse, like BlackBerry, and a much more successful company wants to acquire it then the stock can skyrocket.
2. Social Media's Relationship With Stock Gossip
With the massive adoption of social media into our daily lives, Facebook, Twitter and LinkedIn could be places to find the next hot tip or speculation of something about to happen to a company.
Twitter is a great example of this because the microblogging website is seeking out a new CEO, and any possible hint of Dick Costolo’s successor could help the stock inch upwards. There is also talk of a potential acquisition from a host of tech giants.
The U.S. Securities and Exchange Commission, or SEC, even commented on the possible fraudulent nature of social media. Here is a statement the federal agency made on social media and its effect on the stock market:
While social media can provide many benefits for investors, it also presents opportunities for fraudsters. Through social media, fraudsters can spread false or misleading information about a stock to large numbers of people with minimum effort and at a relatively low cost. They can also conceal their true identities by acting anonymously or even impersonating credible sources of market information."
3. Good News = Bad News for Stocks?
A novice trader may believe that good news will often lead to a spike in stock prices. However, oftentimes the opposite is true. Good news can sometimes generate a slight to significant drop in a stock price. This is because rumors can have as much sway on stock prices as confirmed news stories. The stock market waits for these news stories and stocks price in its projections.
If gossip and innuendo are confirmed with genuine investment reports then the price could drop.
The opposite is true as well. If the influx of rumors of a stock is false, then investors could drive a stock through the roof. This is why it’s imperative to keep an eye on investments news on the Internet and watch how those headlines affect stock quotes. That is if you have the time to watch CNBC, Bloomberg or BNN all day.
Anyone interested in utilizing this strategy for their investment portfolio should realize that rumors are great for the short-term trader. However, if you’re long on a stock then you’re much better off at analyzing forecasts, paying attention to corporate news and refraining from buying and selling at a moment’s notice.
There is an old saying on Wall Street: "Buy on the rumor, sell on the news." Ostensibly, Wall Street is filled with not financial experts and expert stock pickers, but rather gossip queens.