How a Stock Market Overreacts to News

If you should be a stock trader or investor, then you definitely surely have observed market over reactions in the past. A story breaks, and when you even get to read the very first word of this article the stocks related compared to that story have previously taken huge jumps up or down. I have already been trading stocks for quite a while now, and have observed trends for sure. I thought I'd explain why I believe markets, specially the stock market over over reacts to both good and bad news almost instantly. Be warned that this is simply not something I trade on, as I'm more of a long haul investor/trader, nor should you read too deeply into my reasons. 2 Reason the Market often over shoots it's target on news:

#1 The Media Often Overreacts
As with any news story, if the media thinks it may gain your viewership by reporting on a one sided basis, they usually will. The media is known for their exaggerations sometimes, and its part of each reporters thinking. Greater the news story, the more people who listen in, so, even if a media outlet claims to be fair and balanced, they are likely to over hype, or over respond to many breaking stories. Because of the media's overreaction, investors usually get over excited and either buy or sell stocks related to the given news story for prices well above or below it's eventual target price.

#2 Panic
As traders see a breaking news story that'll affect an inventory, they panic, and instead of taking even just a few minutes to read the whole article, or listen to the whole news broadcast, they hit the buy or sell button with respect to the story's baring on This Weeks Top Stories About Stocks. Sellers, if negative, or buyers if positive flood the market, pushing an inventory in one direction before the public becomes aware of all of the details and more rational minds bring the stock back from the extreme it really hit.

As a trader you have to sometimes sit out and show patience and soon you, yourself have all the information necessary to make an educated rational decision. Ignorant decisions predicated on quick glimpses of over hyped media will really lose you money in the long run.