The main reason why the price of any asset changes/fluctuates in the financial market is the changing rate is supply and demand, explains Konstantin Rabin of Top Forex Brokers.
When the demand increases on any certain asset, the price is growing with direct proportion and vice versa, when the demand is low, the price goes up. Moreover, the price is very sensitive when any new event is happening which might affect the demand or supply of the asset.
However, the experienced trader on the stock market acts before any kind of breaking news because he/she has anticipation for future events. Unfortunately, not everyone involved in the financial market is an experienced trader and still, the breaking news and announcements have an important role in stock market volatility.
When the asset is affected by short-term volatility (because the news is spread at a high speed) the only thing the investor can do is not to take this news seriously and to have diversified his/her portfolio for the long-term investment.
Before we generalize the impact of the news on the financial market, especially on the stock prices, first we should analyze the nature of the news itself. Generally, when the news is negative, it will encourage people to sell portions of the stocks and vice versa, positive news will encourage people to buy the stocks, and in the end, the price will go up.
However, there are some cases that do not correspond to this logic and are out of this chain. This happens when the bad news appears to be good news. For example, a natural disaster happens and the government is obliged to carry out large quantities of purchases, this will increase the stock price of the company which will provide help for the government in this case. This news is uniquely bad for people who were affected by the happened event, but it had a positive effect on the company itself.
Anticipating the News
As we have already mentioned above, professional traders act accordingly, when they are predicting or anticipating any kind of news or announcement to occur, thus they are able to buy or sell stocks before the actual numbers are released. Some of you might think that it looks like fortune-telling, but here are some important aspects that are valuable to count on in terms of predicting future numbers.
- Government economic reports - this report encompasses the main changes and statistical data on the financial market. With this, you are able to determine the readiness for buying or selling, the report has the legging and leading indicators.
- Company and industry news - traders want to know the information about the assets on the actual time and quarterly reports are old news for them.
- Gossip - in the stock market, “whisper numbers” may have a great influence. Activities which are made after these rumors are either valid or not.
There are some events that just cannot be anticipated. Take the example of Coronavirus. Nobody in December 2019 would have imagines that they would have to spend the next year living in just one place and doing everything from there, working, attending events internationally, or even buying daily needs online. This had an unexpected effect on the financial market and stocks themselves.
Due to this reality, many companies were broken while some of them emerged in a way they had never operated on the market before. Take the stock price of Zoom (ZM) as an example. Not everyone before 2020 knew about this application, it was used by certain categories of people and not even on a daily basis.
What is happening now? Everyone, starting from a 10-year-old school kid and ending up with X company CEO, have if not daily—or at least weekly—touched this application. This is the main platform for conducting school lessons, university lectures, work meetings, or even political events. The words which describe it perfectly are that as the demand and the usage of the Zoom application increased dramatically, the price of the stock increased respectively.
There are several valid examples of news and announcements that have affected the stock prices of many different companies.
News Influence on Wall Street
Imagine one of the world’s biggest companies, Microsoft, announced that they had a year-over-year increase, but it was anticipated by Wall Street to be more. This means that the expectation was higher, but it did not meet the reality. This is why the price of the stocks would fall down since they would start selling the stocks. Once the price is already low, some of the traders might decide to buy the stock at a lower price, which might start the price to increase even several hours later.
Political Influence on the Stock Market
Other than the changes in supply/demand or natural phenomena, there is one more important aspect that has an influence over the stock market, and this is politics. Some of you might think that not everything is connected with politics or even should not be, but the examples at the end of the article prove wrong.
One obvious reason is that politics mean new laws and regulations in the country, which might have an effect on any company and on its stock price. This is all called the indirect effect and is why people might not be able to see the actual cause. Those regulations will affect bottom-line results and if the effect is expected to be negative it might even lead the investor to sell the stocks.
Political laws and regulations might have a different effect from political news but the impact itself might be short-term. For example, electing Trump as the 45th president of the United States, affected the oil industry in a positive way because he chose traditional energy sources to be an important part of his election campaign, rather than the alternative energy sources such as solar power. This is why the stock prices of Saudi Arabian companies were increased. (In the next paragraph you will see how Joe Biden’s election campaign, which was focused on clean energy sources, led Ford’s stock price to increase.)
However, we can say that in the case of the United States, political parties do not really matter. The stock prices rebounded during Obama’s presidency when he pulled the economy out of the recession, while the stock market also did well during Trump’s presidency, but it is vivid that the focuses were different.
Biden’s Influence on Ford Stocks
Joe Biden’s policy as a US sitting president has made many changes all over the world. Little did we know that his policy to focus on clean energy would support changes in the car industry. The President has promised to build a half-million more energy stations for electric vehicles. Since Ford Motor Company (F) is actively starting to work on clean-energy cars to reduce carbon emissions, its stock prices have risen by almost 12%.
Trump’s Decisions on US-China Trade War
One of the most memorable moments or decisions of Trump’s presidency was the start of the US-China trade war, over accusations from Donald Trump regarding China’s unfair trading practices and intellectual property theft.
This led to the practice of setting tariffs on Chinese products in order to promote national industries, which to add to that, caused the stock price changes of Chinese companies worldwide.
Musk Effect on BTC and Dogecoin
Elon Musk is well-known not only for owning SpaceX but making interesting and intriguing announcements too. The following two announcements had the biggest impact, not only on people who are involved in the financial market, but on the general public too.
First was the comment on Bitcoin, when his company SpaceX and NASA flew their spaceship to the space station with the main goal to fly humans to Mars. He announced that people will be using only Bitcoins when they will start living on Mars. This comment raised demand on the BTC, and the price has increased dramatically. Moreover, his company “Tesla” has added Bitcoin as a payment method on the website.
After that, he already did not have to make any comments, only a one-word tweet “Doge” was enough for people to start buying the Dogecoins.
Finally, to sum up, the news has a huge impact on the financial market and on the prices of a company’s stocks when those comments are from as high authority people as it was shown in several examples. The main factor for the trader to take into consideration is the quality of the news/announcement because not all of them may have a big impact on the prices. It is not called prediction (which is not based on the statistics), but anticipation, when you act accordingly and use the circumstances for your own good.
By Konstantin Rabin of TopForexBrokers.co.za - a South African brokers comparison website.