Buy the rumour, sell the news goes the old adage.

Follow the market rumour

Prashant Mahesh & Nikhil Walavalkar, ET Bureau





Buy the rumour, sell the news goes the old adage. One sees this playing out in markets all the time. Share prices inch up days before a company announces its results only to correct immediately after the company declares record profits.

But recent events have shown that following rumours can prove to be quite hazardous for your financial well being. A few days ago, a leading bank’s stock saw its price tumble 3.5% during the day, on market rumours posted on a blog. Though the stock subsequently recovered with the bank denying any such thing, this has important lessons for retail investors to learn. “One of ten rumours may be true, so if you are an investor, do wait for verification before acting on the news”, says VK Sharma, head private broking & wealth management, HDFC Securities.

Get information

Today you can place orders on the broker who is sitting on a live terminal or even use the internet to trade online, and know the status of the order with every passing second. Similarly, dissemination of information has changed. In 1995, you had to rely on the newspaper or the annual report from the company for corporate information with very few having access to the internet, which was primarily used for sending e-mails only.

However, today, dissemination of information happens in nano seconds. You have wire services, websites, 24-hour television channels, blogs, corporate websites where you have a plethora of information. With the markets getting increasingly globalised, news comes from various parts of the world. The question now is: How does an investor separate the wheat from the chaff?

Types of news flows

There could be a variety of news affecting financial markets. Some could be company specific. For instance, a company wins an income-tax case in which a refund of Rs 1,000 crore is involved, which improves the cash flow of the company.

Other types of news could be macro-economic or geopolitical in nature. Take for example, Met department forecasts of rains being below normal. Such news is not specific to a company but could affect the markets.

Source of news

Follow the trail. When the news reaches you, try and identify the source of the news. If it is an official announcement, you will find it on the website of the stock exchange, where it is listed. If there is no such announcement on the exchange site, wait for the clarification from the company’s end. Large companies do come up with clarifications as soon as possible.

Investors could look for clarifications in electronic media, such as news channels and official website of the company. “In a market where many M&As are occurring, it is very easy to spread rumours. However an investors must remember that there is no free lunch”, says Sadanand Shetty, vice-president & senior fund manager, Taurus Mutual Fund.

The potential traps

There are a lot of unregulated entities who keep feeding markets with rumours, short-term and positional calls on the stock markets. If and when investors subscribe to these services, they must clearly know that these are not necessarily fundamental calls and by subscribing to these services the investor is taking a risk. These can be stock price manipulation attempts and you may be caught on the wrong side of the activity.

Also there are instances where you receive SMS’s from unknown entities giving some information about or a trading call on a stock. Be very careful before acting on the stock. Instances have been observed where volumes are created in the market, spreading information using bulk SMS service, to offload one’s position.

If you are a trader

In the short-term, markets may be affected by greed and fear, which could affect your position. So every trader needs to work with a stop loss. Besides, you should not trade a stock when adverse rumours are already floating in the market on the same. Buy on rumour and sell on news has been the norm in stock markets for a long time.

It makes sense not to act on news that has come after a long rumour mill in the market. It is likely that the impact of the development is already factored in the market price and ‘early birds’ may prefer to book their profits upon confirmation of news. In that case the stock moves contrary to the impact anticipated.

If you are an investor

As an investor you don’t have access to the company’s management at short notice. Hence whenever you invest, it is essential that you invest on the basis of company fundamentals.

If the fundamental research is right, then rumours are unlikely to affect the company and it is only a matter of time before the stock bounces back. Such temporary weakness can be used to add to your positions in the market.