How News Affects Stock Prices?
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9.11.2024 1:03 AM
In April of 2022, Elon Musk publicly announced his proposal to purchase all of Twitter. The day after the market opened, the stock rose 6%. But how was it possible that an announcement like this could have such an impact on a stock’s rise?
News like this happens every week, and it can often catch investors off guard. That’s why it's crucial to understand the various external factors that can quickly move the price of a stock. In this Hapi article, we explain the most important external news factors that affect stock prices and take a deep dive into the case of Elon Musk and Twitter.
Certain news about external events indirectly alters a company's fundamentals and influences the supply and demand for its stock on the stock market. Some examples include:
Mergers, which involve the union of two companies, and acquisitions, when one company buys another, generally increase the value of companies. This happens because the synergies between the two can create greater growth opportunities, diversification, and expansion into new markets.
A recent example of a significant acquisition is Microsoft's purchase of Activision in January 2022. The acquisition deal aimed to expand Microsoft's presence in the gaming world and gain a competitive edge in developing entertainment experiences in the metaverse. This news excited investors, leading to an impressive 25% jump in one day.
The inclusion of a stock in the portfolio of a major investor can cause a significant rise for two reasons. First, the large size of the purchase leads to a substantial increase in demand for these shares. Second, the preference of a reputable investment fund or well-known personality provides confidence or reassurance to smaller investors, creating a ripple effect.
Recently, Warren Buffett added Nu Bank stock to his portfolio. This startup is a digital bank contributing to a wave of financial inclusion in Latin America. This news sparked interest among many institutional investors to follow suit and invest in this successful startup.
The development and market launch of new products by competitors can put competitiveness at risk for other companies in the long run. This leads to a drop in the stock prices of these other companies due to lower expected market share and, consequently, lower earnings.
A well-known example is Apple's product presentations, which usually happen every year. If the company's new devices are innovative and attractive to the public, its stock will rise. Meanwhile, competitors' stocks will fall as investors expect them to lose their competitive edge over time.
New regulations can drastically affect or benefit companies in a sector overnight. The legal framework sets the rules of the game for businesses and often determines the success or failure of a sector.
For example, medicinal cannabis businesses in the United States largely depend on the legalization of its use across many states to continue expanding. Time and again, stocks in this sector have experienced sharp fluctuations due to regulatory changes in parts of the US.
If the commercialization of these products is legalized in more places, the market size increases, and with it, the company's expected benefits. This is reflected in a rise in stock demand and higher prices.
A shock is any unexpected event that significantly alters economic activity. A demand shock usually impacts one of the following components of GDP: consumption, investment, government spending, or net exports. On the supply side, it reduces or increases production in an economy. Ultimately, supply and demand are interrelated at a macroeconomic level.
Think of the shock caused by the pandemic. It had economic effects on both sides. On the demand side, investment fell due to uncertainty about the severity of the disease, and consumption dropped to a lesser extent due to reduced household income. On the supply side, production suffered a sharp decline due to mandatory lockdowns and the suspension of economic activity.
All of this significantly influenced stock prices. In general, it led to a mass sell-off that drove prices down. However, stocks in essential goods, telecommuting, or health sectors benefited from this shock.
Now that we know which news can influence stock prices and where to find reliable information, let’s take a closer look at a real case:
Elon Musk is the co-founder of more than six successful companies, including Tesla, the world’s most valuable car company, and SpaceX, the first private company to offer commercial flights to space. Thanks to his companies, Musk is currently the richest person in the world, with $265 billion.
This wealth has made him highly influential on social media platforms like Twitter, where his originality and humor stand out. However, that popularity has also given him the power to strongly influence the US Stock Market and cryptocurrency markets whenever he tweets about an asset.
According to Washington Post, Elon Musk’s interest in buying Twitter stemmed from his free speech philosophy, which he referred to as being a free speech maximalist. As Musk tweeted in April: “Twitter has become kind of a de facto town square, so it’s really important that people have both the reality and the perception that they can speak freely within the bounds of the law.”
Many analysts suggest there were other reasons behind this proposal. In reality, this initiative benefited Musk, as his offer came after he had already made a significant stock purchase at a lower average price. As a result, his shares also rose following his announcement to buy the entire company.
What happened to Twitter’s stock after this announcement?
Following the public proposal to buy Twitter and the board’s subsequent approval, the stock price increased by 14.68% in just one week. Many retail investors in Twitter were confused about the implications of this move. Other new investors joined in, ready to ride the wave of future growth.
Over time, however, negotiations became more complicated. The company failed to meet the conditions Musk had set for the deal, leading to his dissatisfaction.
In July, Elon withdrew his offer, and the stock hit a low of $32.64 per share, 36% below the last peak. Recently, negotiations resumed, and it appears both parties are moving toward an agreement, with the stock price returning to an upward trend.
Just like Elon Musk’s news about buying Twitter shook the markets, many external news events can change the direction of the Stock Market.
There are many external factors that can benefit or negatively impact companies listed on the Stock Market: mergers and acquisitions, investments by major investors, new products, regulatory changes, economic shocks, and more.
With so many elements to consider, it can be overwhelming to keep track of everything. That’s why it's best to study the company you want to invest in thoroughly, check the news periodically, and not worry too much about daily price movements.
Another thing to keep in mind is that when news becomes public, the market has often already priced in the effects of that event. That’s why it can be difficult to capitalize on a news-driven investment opportunity after the fact. The phrase “buy the rumor, sell the news” explains this phenomenon well.
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