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Investment & Finance

How do pieces of information impact the value of a stock?

By
Jessica Cutter
Updated
December 7, 2023
5 minute read
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Data, metrics, news, and opinions are a never-ending cycle, coming out left and right that ignite market movements. With niches and strategies for every sector, investment group, and platform, it’s essential to go to the roots of what impacts stocks to understand the value of prediction. News can significantly change the outlook of a particular company, but oftentimes with flying narratives and agendas it can lead to an investor making poor decisions. 

What factors typically move the market? 

The cornerstone of the entire market falls all to a simple concept of supply and demand, so if you can wrap your head around that concept, get ready to get overloaded. Surrounding supply and demand are the factors that impact the overall market, which in turn affect stock prices and then whether or not an investor makes gains. 

There are three main categories of factors that affect stock prices (supply and demand):

  • Fundamental factors: Relating to a company directly, such as its earnings, growth prospects, and financial health.
  • Technical factors: The analytical factors surrounding a stock, such as the price history, trading volume, and market sentiment.
  • Market sentiment: This is comprised of economic news, political events, and investor confidence.

The relative importance of these factors can vary depending on the specific stock and the market conditions. However, in the long run fundamental factors are the most important drivers of stock prices. Technical factors also have a significant impact on stock prices, but in the short term. For example, if there is a sudden increase in demand for a stock, the price may rise even if the company's fundamentals haven't changed (supply and demand).

The kicker is that market sentiment can be a powerful force that comes out of nowhere embodying an unpredictable, yet impactful ability that disregards fundamental and technical factors. If investors are feeling optimistic about the future, they may be more willing to buy stocks, even if the prices seem high. Conversely, if investors are pessimistic, they may be more likely to sell their stocks, even if the prices seem low.

Why is news so significant? 

As an investor, you could plan for decades based upon the fundamental information that’s provided about a company, but market sentiment, whether it’s political, economic news, or even a prank, could wipe out potential earnings within minutes. 

The obvious example that is pertinent to market sentiment is the fake Eli Lily Twitter account that sent the company plummeting. What happened? The seemingly real Eli Lily account tweeted out, “We are excited to announce insulin is free now,” throwing the pharmaceutical company into a world of confusion and plummeting the stock by nearly 5% through the false narrative, which brought the price down by $16. The example remains a significant indicator of trolling and false news hitting a company where it hurts. The sentiment around the company plummeted, although eventually going back up, it was unpredictable. 

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The upside of market sentiment? It can propel gains if you jump in at the right moment like the new acquisition news surrounding Zoom. What happened? Just yesterday, news broke that there was a deal underway between Five9 and Zoom (one that had previously fallen through 2 years earlier), which propelled FVN up by 10%. Although there is no official acquisition or deal underway, just the implication sent the stock soaring making some day-traders

These two isolated examples are small compared to the impact that was felt under the unpredictable 2020 Pandemic or geolpoltical factors in the middle east, exemplifying the power that market sentiment has on the market. It can flip a company’s outlook and unprecedented events can flip a country’s outlook. There’s no way perfect strategy for deciding what’s real, fake, impactful, relevant for the market, so what can investors do? 

How do you navigate the madness? 

Average investors are left with a sea of opinions and perspectives to manage their portfolio. With strategies outlining what to do, but often the initiative to do the research is left behind, causing a conundrum if you’re trying to predict the outcome of an investment.

With news constantly bombarding us and emotions riding high, navigating the market can feel like whitewater rafting. But fear not, here are some tips to keep your head above the churn:

  • Embrace the Long Term: News might cause short-term blips, but a company's long-term fundamentals are the true engine of its success. Focus on factors like earnings growth, competitive advantage, and a strong management team. Don't let a single tweet derail your well-researched investment thesis.
  • Diversify, Diversify, Diversify: Don't put all your eggs in one basket. Spread your investments across different sectors, asset classes, and even geographical regions. This way, a sector-specific news event won't wipe out your entire portfolio.
  • Be Wary of Hype and Herd Mentality: Remember the Eli Lilly fiasco? Sensational headlines and bandwagon trends can be deceptive. Do your own research, question the narrative, and avoid getting swept up in the emotional frenzy.
  • Consider AI as Your Copilot: While not a magic bullet, AI-powered tools like alphaAI can be valuable allies. Our AI models sift through mountains of data, analyze news sentiment, and identify potential trading opportunities. Think of it as having a team of tireless analysts whispering insights in your ear.
  • Remember, It's a Marathon, Not a Sprint: Building wealth takes time and discipline. Don't expect overnight riches or get discouraged by temporary setbacks. Stay focused on your long-term goals, make informed decisions, and ride the waves of the market with a steady hand.

The Bottom Line: 

News may move the market, but it doesn't have to control your investment decisions. By understanding the interplay of factors, staying informed, and utilizing smart tools like AI, you can navigate the market's turbulence and chart your course towards financial success. Want that AI copilot you can trust? Learn more about alphaAI on our site.

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