Nowadays news about the stocks are available absolutely free everywhere and on the net. Are they real?., Yes, they are real. Can you trust them., Yes, you can trust. Can you make a trading decision out of it?., A BIG NO!!
A BIG WHY? Read Further... :-)
The action and reaction time of the prices in stock market are so fast that by the time you read or get the news and take a decision based on the news, the news becomes obselete and the price of the stock would have absorbed the news already and by the time you enter, it would be too late already.
I would like to quote a famous example.
Imagine, there is a channel that monitors each of the roads and signals in a city and provides traffic information to the common people.
Due to the large number of roads & signals, the time to get back for the next update of a road or a signal is 5 minutes.
There is a blind man driving a car. His friend is sitting in his house and monitoring the channel and giving instructions. The blindman stops at a signal and then waits for the "green light" instruction from his friend. His friend waits for the channel to broadcast the latest update on that signal (which is delayed by 5 mins). He eventually gets it and communicates to his driving friend (blind man) and he takes action (resumes driving) for the green signal.
Will this work ? A Big No, right ? So is the case for most of the news and recommendations.
It might also happen that, the blind man might be able to go through without any trouble. After all, a dead clock also shows correct time twice in a day!! That doesnt mean the clock is working...
Who the blind driver is? Yes., we the retail investors are pretty much like the blind driver...
I would like to quote another case. Once Infosys announced its results and the results were very positive; better than its previous year's same quarter, better than its previous sequential quarter etc etc. The general expectation of the crowd would be to buy Infosys shares based on the news/good results. But what happened in the market was, Infosys went down by more than 10-15% in a matter of few days after the results were announced. So, what is wrong? Upon further analysis, I realized that, prior to the announcement of the results itself, the shareprice has gone up by more than 20% (in expectation of better results). So, once the results were announced, profit-booking kicked in and hence it went down.
Now to re-instate:
The action and reaction time of the prices in stock market are so fast that by the time you read or get the news and take a decision based on the news, the news becomes obselete and the price of the stock would have absorbed the news already and by the time you enter, it would be too late already.
What is the moral ?
Short-term traders/investors: Buy on rumours and sell on news!!
Long-term traders/investors: Look behind and beyond the news!!!
Happy Investing...
Selva.
