It is always big question for stock market beginners that why do shares fall on good news? – In this blog we will discuss on this topic including why good news may not always be good news for the investors?
To understand this in better way first of all we need to understand the basics & fluctuation of stock price.
Why Stock Price Fluctuates?
In the Economics demand and supply is very important factor similarly for stock market, it works on demand and supply. If the demand of a stock is greater than the supply, then its price will go up. Vice versa, if the supply is high and the demand is less then the share price will fall. Also, Increase/decrease in the demand or supply of a stock depends on a number of factors.
News is one of the important factors for Increase or decrease in the demand and supply zone. For example – negative news like failed products, bad earnings reports, resignation in top level management, etc. can decrease the demand for stock which will further decrease in the share price that directly increase in the supply of that share. On opposite side positive news can decrease in supply of that share of share and increase in demand of that share price.
Overall, the price movements seem simple. Right? – The share price movement is not always that straightforward. There are many things happening under that you need to understand.
Why do Share price fall on good news?
There can be a different situation when good news may not always be good for the shareholders. Good news may not always be good for the investors.
One of the simplest factors behind why do share fall on good news? Can be the phase of the economy. – whether the economy is in expansion phase or contraction phase right now?
If the overall economy is going down globally or locally, then it might be dragging the stock down in spite of the good news.
Many time markets are good and the economy is doing perfectly. Still, the stock goes down after good news. Still, the stock goes down after good news.
Reasons why stocks may fall on good news.
- Future expectations
- Stock market is all about the future expectations. Current or past good news is good for the investors but the comments about the future can easily manipulate their mind.
- For example – Suppose you got your current Phone bill turns out to be ₹ 1000, less than the last month. However, you also received a notice that the call charges are going to significantly increase from next month.
- In the same way, if a company announced a good result for the last quarter. However, in the same quarterly report/announcement, they also highlighted some issues which might affect the profitability of the company in upcoming month/years.
- In such scenarios, instead of enjoying a good result for last quarter, the shareholders might take the news adversely and it may lead to a fall in the share price.
- Noise Traders
- Another possible reason for a sell off following good news is related to noise traders.
- Noise trader is generally used to describe non-professional investors it may also include technical analyst.
- With the expansion in online trading, the noise trader has increased a lot over the last decade. They do not analyse the fundamentals of the company but make their trades based on news or technical indicators / trends.
- For example – in scenarios of sell-offs in a stock due to whatever reason, these noise traders will sell their shares and exit their position. Many a time, noise traders drag the share price further down.
How you can come out from this kind of situations?
- For long term point of view if fundamentally stock is strong, you can hold the stock despite the stock price going down. It won’t matter much in the long term. Most of the companies focus on their long-term goals. They might miss the shorter-term expectations.
- Overall, if the company is performing good in the long run, then no need to worry. Most of the companies cannot do well on short term but can achieve their long-term goal. Do not get attached to the short-term results and expectations.
- So, if the temporary drawbacks are not going to affect the long-term profitability of the company, then you can hold your positions.
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