"Buy the rumor, sell the news" ???

Question

Can anybody explain this trading advice in a way that makes sense?

Answer 1

Once there's the first wiff that something might happen, that's the time to get in. Once it's on CNBC all of the big money has been made and it's a good time to sell and lock in the profit. For example, Cramer from time to time will speculate that a stock is so low now it's a good takeover candidate because the fundamentals are sound. Once someone makes an offer to buy them, it hits the news, the price jumps, that's the time to sell it because the big pop is over.

Answer 2

People buy stocks because they expect them to go up in price. Then they can sell the stock at a profit. A rumor is a story about a stock that may or may not be correct. "they are going to report sensational results - way ahead of expectations" or "they are going to pay a higher dividend" or "they are a takeover target". Now all three rumors will suggest that the price will move higher. Yet they have no basis in known facts. They are opinions - so they cannot be verified. If they could be verified, they would be news.
Different people will put different values on the stock depending on how seriously they took the rumors. As the price moves higher, other people will begin to believe that the rumor may, after all, be correct. They will buy, and the price moves yet higher - which convinces more folks to buy - based on the rumor.
News, on the other hand, leaves very little room for different opinions about the stock so people who bought on the rumor may or may not think the news is good enough to hang onto the stock - so they sell.

Answer 3

Hi Anna. Both rumors and facts (the news) can affect the price of a stock.

Let's look at rumors first. Suppose a rumor comes out that the company is going to have a disappointing profit report (this is not yet a fact, it is a 'rumor'). This rumor will drive down the price of the stock, which may make the stock a 'good buy'. Thus, you would buy on the rumor (get a good price on the stock).

Now, a little time goes by and the actual profit report comes out. Usually rumors are not accurate, so the profit report will likely be better than expected (better than the rumor). So, now the stock price will adjust upward. Now you sell the stock at the higher price.

So, you can profit by buying on the rumor and selling on the news (the fact).

Of course, if the profit report is worse than expected (and/or more negative rumors come out!) the price of the stock can continue to slide downwards. So, this technique is only a guide and NOT a bullet-proof trading mechanism.

Hope you find this helpful. Best wishes and good luck.

Answer 4

Stocks trade on expectations and price in (discount) fututre events.

If a company is expected to report strong earnings, speculators will bid up the price ahead of the report. When the report comes out, the stock has already fully priced in the earnings increase - so they sell.

Answer 5

you bet ye.