Headline Risk

Fundamentals of Market Investing by Adam J. McKee

If you have ever watched the financial news during the trading day, what is said on those programs can have an immediate impact on stock prices.  Many traders are risk-averse to the point that they adopt a “sell first and ask questions later” mentality.  At times, the news does report something that materially impacts the ability of a firm to make a continuing profit, but often the “headline” concerns the action of some high profile trader, and these sorts of shocks tend to be short-lived  When the headlines are regarded as serious by market participants, the response of the company can be crucial in determining how prices react.  The coverage of Facebook CEO Mark Zuckerberg’s testimony before Congress on data privacy is a case study in how the market likes to hear unambiguous acceptance of responsibility and a plan to fix the problem.  Minimization and denial are often met with sinking prices.

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