How the Stock Market Overreacts to News

If you are a stock trader or investor, then you surely have seen market over reactions in the past. A story breaks, and before you even get to read the first word of the article the stocks related to that story have already taken huge jumps up or down. I have been trading stocks for quite a while now, and have seen trends for sure. I thought I’d explain why I believe markets, particularly the stock market over over reacts to both good and bad news almost instantly. Be warned that this is not something I trade on, as I’m more of a long term investor/trader, nor should you read too deeply into my reasons. 2 Reason the Market often over shoots it’s target on news:

#1 The Media Often Overreacts
As with any news story, if the media thinks it can gain your viewership by reporting on a one sided basis, they usually will. The media is known for their exaggerations sometimes, and its part of every reporters thinking. The bigger the news story, the more people who tune in, so, even if a media outlet claims to be fair and balanced, they are likely to over hype, or over react to many breaking stories. Because of the media’s overreaction, investors usually get over excited and either buy or sell stocks related to the given news story for prices well above or below it’s eventual target price. Sports

#2 Panic
As traders see a breaking news story which will affect a stock, they panic, and instead of taking even just a few minutes to read the entire article, or listen to the entire news broadcast, they hit the buy or sell button depending on the story’s baring on the stock. Sellers, if negative, or buyers if positive flood the market, pushing a stock in one direction before the public becomes aware of all the details and more rational minds bring the stock back from the extreme it just hit.

As a trader you have to sometimes sit out and be patient until you, yourself have all the information necessary to make an educated rational decision. Ignorant decisions based on quick glimpses of over hyped media will surely lose you money in the long run.

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