Stock market?
When a company announces bad news or the company makes less then expected, why does the stock often go up?
and visa versa?
I often hear stuff like this when listening to bussines news.
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There are market expectations on what a company will announce in their quarterly report. If it is better than the expectations, even if it is a loss, the market sometimes responds by bidding up the stock. Even though the expectations are only estimates, many stock holders use these estimates for their decisions, and change by buying or selling the stock if the actual numbers are different. Lately, even the company’s announced expectations for future earnings has been enough to change stock buys and sells.
When a company makes less than analysts expectations it gets hammered because the stockholders price shares at future expectations. For example if XYZ company comes out with a new great product and analyst, stockholders, and the general public think its going to be a big profit, the stock will make a big upward move because it will be factored into the stocks price. Then, when earnings are reported to the public, and they’re less than expected, the stock gets hammered, because it did’nt meet expectations and obviously theres more sellers than buyers.
The streets weird though, even if the company reports a loss the stock will rally if it beats the expectation.
What is sometimes missing is that the announcement may also say what was wrong and what they are going to do to fix it. Say a bank announced it had a losing quarter. But it also announced that the division that was responsible for most of the loss is being broken up and an what can’t be sold will be closed. Many just read the headlines, written by simplistic, though sometimes cutsy, journalist-types that merely have to fill what print space that the sales force didn’t find ads for. So, we scan the highpoints and miss the good stuff — the reason for most of the loss for an otherwise profitable business has been addressed. So we who read the details start buying this already cheap stock because its prospects are now rosier.
The other way is just as frustrating. I sat on one company with good prospects, saw a 40 percent rise in 4 months and when the annual report came out, the stock OPENED 40 percent lower. Right out of the gate on the next trading day, the market wiped out 4 months of gains without an opportunity for rebuttal. This is a case of the market figuring that the news won’t be getting any better any time soon, and they were right.