There is a phrase ” The Unknown is Perceived to be Grand”. Today’s topic is somehow indirectly related to this phrase. Those who are we well-acquainted with Stock Market may think the phrase “buy the rumor sell the news” sounds like a precarious plan but in reality, it can also be a shrewd one. It is such a phenomenon that happens in most of the financial market. Nowadays, it is considered a popular trading strategy.
What is the Buy the Rumor Sell the News Strategy?
This is an investment strategy whereby investors purchase assets on rumors of upcoming events that may be beneficial for those assets. They then sell after official announcements regarding those events come out. It is a speculation-based strategy based on holding only for short-term periods of time.
Buy the Rumor
The first and foremost thing to understand about the stock market is it is forward-looking. The term “forward-looking” indicates one of the most crucial features of the stock market. It’s a common phenomenon that the price of a stock doesn’t represent the value of the company’s past performance. Hence, news, and rumors play a vital role in determining a stock’s current price.
Sell the News
This part carries exactly the opposite behavior to the previous part. As the stock price moves in anticipation of rumors after the news agencies release the actual news, it reacts again after the profit-taking occurs. Therefore, for obvious reasons, the tactics are risky enough to implement. Basically, in simple terms, based on the rumors price reaches a new high before the event. Similarly, it falls lower immediately after the event because of profit booking (even when the news matches the forecast).
Examples of Buy the Rumor Sell the News Strategy
We have to admit one thing Companies, headlines, and earnings numbers don’t move the stock market that much. Rather, traders move the market by buying and selling stocks. In order to clarify the concept, I present some of the recent examples from the Market.
The Example of Yes Bank
A few days ago, the shares of Yes Bank fall drastically due to the resignation of Independent Directors R Chandrashekhar and Vasant Gujarathi, and Non-Executive Chairman Ashok Chawl. Now, the twist is there is a rumor that the YES bank board is about to finalize the CEO candidate at January 9 meetings. After the meeting, the bank will send the name of the candidate to RBI (Reserve Bank of India). Hence, it’s obvious that YES Bank stock will rise high before 4-5 days of the meetings and drop on a particular day. You may monitor the phenomenon by yourself before 9th Jan.
The Example of Jet Airways
Jet Airways is another example of this phenomenon. There was a rumor that Tata Group plan to acquire a controlling stake in Jet Airways. After releasing the rumor, Jet Airways Stock price reached its peak (From the 200 range to the 400 range) but a few days later the deal was postponed, and the share price level fell.
The Example of the Nifty Index
Lastly, we present an example of Nifty. The strategy can sometimes be “sell the rumor, buy the news”. After exit polls result for five states showed Prime Minister Narendra Modi’s popularity is in doubt going into the 2019 election, Indian equity benchmarks opened lower on Monday.
I’ve stated above that the rumors can be true or false. But one thing is sure some of them affect the stock market very deeply. As a result of the exit poll rumor, the Nifty 50 Index fell as much as 1.94 percent to 10,486 early on Monday. Here is the graph:
So, these are some of the real-time examples of buy the rumor sell the news phenomenon, taken from the market situation.
FAQ
Sell the news is a trading strategy where you take profits off the table after a positive announcement. Traders can do this to minimize risk or potentially earn higher returns from temporary market volatility that usually follows a major event.
An example of buy the rumor and sell the news would be if investors purchase stocks before earnings announcements in anticipation of good results, but then liquidate their positions upon release of those results as they have already been priced into stock prices by then.
Rumors can create price movements and rapid increases in volume for certain stocks which can lead to both long-term gains and losses for investors taking active stances on them. Such incidents also increase uncertainty in markets, leading to periods of high investor anxiety until full disclosure creates more clarity about corporate actions related to such rumors or speculation.
Buy The Rumor, Sell The News is a scenario when traders attempt to recognize opportunities within a market’s pricing models by analyzing changes occurring due to widely circulated prospective events. That means, buying ahead of what may happen. Similarly, selling once it actually happens since it may already have impacted expected outcomes reflected in current price levels.
Conclusion
In conclusion, the old adage “buy the rumor sell the news” is as relevant today as it’s ever been. It tells traders to capitalize on market movements created by rumors. They can then sell off stocks once any actual news that has emerged in relation to their investment confirms what was being said originally. At StockManiacs.net, we wholeheartedly believe in this age-old wisdom. We also recommend always doing your due diligence when trading so you get the maximum return from your investments!
