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Published On: Mon, Sep 29th, 2014

Why do positive news for a stock sometimes result in a dump?

Generally, good news are a reason to hold a stock. There are a number of situations, however, when good news result in the specific share's decline.

Good news, e.g. of a company’s solid earnings, are often a signal to hold a stock. There are also instances when getting rid of the share despite the good news is the wise approach. It is of prime importance to be able to discern such cases.

Sometimes companies, which are apprehensive that bad news would seriously hurt their stock, add some positive announcement to limit the negative impact. The bad piece of news in that combination should be carefully evaluated because it may be a sign that it is time to give up the stock.

Investors should not only accept the good news but also think of its longer term impact. In cases when, for instance, a company advertises the upcoming launch of a new product, with potentiality of revenue growth, investors should think of the factors involved in the manufacturing and selling of that product as well. It should be carefully considered whether near term earnings would not be followed by massive spending in the longer term. The potential consequences of the good news on the company’s future should always be evaluated before taking investing action.

Even in cases when a company’s earnings beat analysts’ expectations, it is a good idea other factors to be considered as well. A financial report, for example, may show a bright picture of a good quarter, but on the basis of real expectations investors can sense when the company is short of the whisper number and sell before the wide public senses that.

When a specific business exceeds estimates on a regular basis in its quarter reports, shareholders and other investors look on it positively. But even in some established positive trends it may be better to sell, for the reason that the trend may be hard to pursue in the longer term. Such anticipations by large investment companies often result in heavy selloffs.

When a company announces the launching of a new product, analysts expect that would have a positive impact on financial results. The new product, however, may be just a temporary boost, and it may steer the business away from its prime course, into a direction which that firm is not so proficient in. When a new product release is announced, investors should assess whether that product would be a continuation of the business line, and whether it will add to the enhancement of financial results in the longer term.

Investors should always keep in mind that while they may view some news as positive, they should also think of other investors’ bulk view on them. An attempt should be made on guessing what that view would be and how other market players would respond to the release.

About the Author


- ProfitEase.com is a global financial portal that provides news, analysis, economic calendars, streaming quotes, technical studies and other resources about the global markets. The materials on the website cover a variety of fields including: economics and politics; monetary policy; forex, CFD and derivatives trading; commodity markets; bond markets.

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