One post in social networks can bring down the capitalization of the largest companies or cause a rapid growth of stock indices. Should I focus on the news when choosing securities for investment?
“Two Trump tweets collapsed world indices” – all business publications came out with such headlines on May 5, 2019. This morning, the American president, as usual, began to post to Twitter. He said that he was dissatisfied with the protracted trade negotiations with China and intends to raise duties on Chinese exports worth $ 200 billion from 10% to 25%. A couple of hours after this announcement, the Shanghai Composite Chinese Index fell by 5.6% – this is the most significant daily decline since February 2016; another Chinese index of Shenzhen Component fell by 7.6%.
There are a lot of similar examples: because of a single tweet or a message in the media, not only the stock index can collapse, but also the currency or capitalization of the largest company. So, after news of a possible purchase of Yandex by Sberbank, the quotes of Internet companies fell by 3.25% on the Moscow Stock Exchange and by 8.64% on the American Nasdaq Stock Exchange .
Sometimes the reaction is the opposite: Tesla tech-giant shares jumped 7% after the company’s founder, Ilon Mask, said in his Twitter that it allows Tesla to buy from the open market at a price of $ 420 per share. The real price of the paper at the time of publication was below $ 400.
Most Mask post cost is particularly expensive: Securities Commission (SEC) accused him of manipulating the market and required to conclude a deal on which Musk resigned as Tesla chairman of the board for three years and must pay a $ 20 million fine (the same amount was fined a company Tesla) . The commission explained the tough reaction by saying that “in fact, Mask did not discuss and, moreover, did not have confirmation of the key parameters of the transaction, including the price, with any potential investor.”
Why are there Trump or Musk – one tweet of the popular model and entrepreneur Kylie Jenner brought down the Snapchat’s capitalization, as soon as she expressed bewilderment about the new design of the application.
Is it worth investing “on the news”?
The movements of individual securities can be chaotic because of the news and the panic they cause. Another problem with making decisions based on news: news can be fake. Due to fake news, dozens of companies and investors suffer.
In September 2012, an employee of the Chinese edition New Express began to write fake news about Zoomlion, one of the largest manufacturers of machinery in China. He claimed that the company published fake statements and did not disdain to use opaque schemes in sales. Cheating revealed a little less than a year. A journalist who published fake news for bribes from a rival Zoomlion was arrested. During this time, Zoomlion shares on the Hong Kong Stock Exchange fell by 26.9%.
Make investment decisions, succumbing to the minute impulse on the background of the news, it is not necessary. If you are ready to make great efforts, then you, of course, can analyze the financial statements of companies and study official statistics (for example, on the state of the labor market or on the level of depreciation of production equipment).
But a more effective way is to remove the risk of individual companies through diversification. It allows you to continue doing your favorite business without immersing yourself in the “fascinating” world of financial ledgers.
Diversification of individual securities is not a panacea: investors tend to make emotional decisions , and this is one of the reasons why stock prices and other market indicators fluctuate so much. You can protect yourself from such jumps with the help of special tools such as ETF.
ETF – shares of exchange-traded funds. The dynamics of the fund reflect the movements of the index of quotations of a particular market sector or asset, for example, Eurobonds of Russian issuers or shares of American IT companies .
ETF shares protect against market jumps associated with individual companies: due to an unsuccessful joke, quotes of one IT company may collapse, but not ten times.
ETF is a stable thing. Kylie Jenner fails.