The changes in demand and supply of products and services cause the stock prices to fluctuate. However, the demand and supply change is based on the current happenings. News thus has a major role to play in determining whether a stock price will rise or fall.
Everyone new to stock markets wishes to make huge gains quickly. However, in a rush for quick money, they fail to get their fundamentals right and look for ‘trustworthy advice that can help them grow their money. Most people regard news channels as one of the most credible sources of information and advice.
Are you an individual investor wondering if sticking to the news channels will help you book huge returns? While news anchors and YouTubers teaching day trading may vouch for this approach, chasing the news may not be a beneficial stock-picking strategy. It is probably the quickest way to wipe out your capital.
The number of channels showing everyday market reports has increased significantly. Each of them has an expert boasting vast experience in investment advisory and stock markets. While you can trust them for timely reporting, it is in your financial best interest to ignore their advice on stock picking. The success of professional traders may be a misleading parameter here because they base their strategy on anticipated events and not the reported ones.
To understand why you should not be following news recommendations, it is vital to first know how news affects the stock markets.
How does news affect stock markets?
On hearing some bad news about a company, the usual reaction of investors is to sell their stocks. This includes a drop in revenue, issues with corporate governance, ripples in the economic and political landscape, and other unfortunate events. When more people sell stocks, the prices go down.
Positive news, on the other hand, motivates investors to buy stocks, driving the prices up. This includes better revenues, new product announcements, acquisitions and mergers, and other positive signs.
Often, bad news may have different effects on stock prices for different brands. A natural calamity or instance will negatively affect utility stock prices but positively affect home improvement brands. This is because more people will opt for home improvement services in the months following the calamity.
Even if a brand reports enormous growth in its quarterly earnings, stock prices may still fall. This is because the markets may have been expecting an even higher rise in earnings. If the stock plummets to a price lower than its fair price, traders may buy it in the hope of better sales in the current or next quarter. While this will drive the price up, some other developments in the space may cause it to fall sometime later. It is thus not sustainable for all investors to keep following these fluctuations and making on-the-spot buying and selling decisions.
Often termed the conservative stock-picking strategy, the buy and hold strategy is great for individual investors. If you trust the long-term investment approach, you can save yourself the stress from hourly fluctuations in the prices.
Long-term investing is the most sustainable for individual investors. Remember that while the news will cause fluctuations in stock prices, strong stocks will eventually perform well in the long run.
The truth behind news recommendations
Most news channels offer portfolio management services to their clients. Their subscribers profit when there is a sudden surge in demand for a certain stock in their portfolio. News channels drive this temporary demand by recommending such stocks through their channel. While this strategy can get profits for their subscribers – and short-term benefits for you – there would rarely be any significant long-term gains.
Here is an example that describes this hidden agenda:
Suppose a self-proclaimed stock market expert on a TV channel suggests their PMS subscribers buy a stock and hold it for 3-5 days, thus promising 10% returns. The next day they’d suggest the stock on their news channel, promising 100% returns if the investors hold it for a year. The prospect of 100% returns will urge news viewers to invest in the stock, and the volume of investment will cause the stock price to rise temporarily. PMS subscribers will then sell once the target of 10% returns is achieved. The momentary rise will offer assurance to the news viewers that it is wise to hold the stock for the long term. A year later, the stock may not have any value, and the investors would lose money.
In this way, the investors’ trust in the news channel’s credibility would be used to earn profits for subscribers, leaving the investors with a worthless investment.
Thus, avoid making investment decisions based on news recommendations.
If not news based buying and selling, then what?
Are you a beginner in the investment space? Has this article worried you? Wondering whom to turn to for the right investment decisions, if not the news recommendations.
As more people understand the scam behind news recommendations, investors are moving to strategies that involve algorithms and machine learning. It is time for you to understand the fundamentals of markets and stay away from news recommendations, especially if you are seeking long-term returns.
While it may not be wrong to hear analysts and their thought processes, it is always better to do
your research. Learn how to carry out the fundamental analysis of a stock and make it a habit to carry out the required analysis before you invest.
To learn more on how to do this, read our A-Z guide on analysing stock fundamentals on the Teji Mandi blog.
How to find the right stocks to invest in without following news recommendations?
The first step is to know the basics of stock investments. Some beginner rules include looking for a company with a low P/E ratio and analysing the company’s balance sheet to know if they have cash reserves or are neck-deep in debt. You must also diversify your investments.
While these sound simplistic, it may get overwhelming to choose among a multitude of stocks to find the right stock. Also, you cannot go on assessing balance sheets until you find some stocks you wish to invest in.
Here are some things to remember before building your portfolio:
- Know your short-term and long-term goals and design your portfolio around them.
- Find an industry of your interest and stay in touch with news and trends in the space. Just observe the market, do not use the news to make momentary decisions.
- Look for companies that are leading the space and also those that are growing steadily.
- Use the industry knowledge you gain from your research and relate it to your goals to make buying and selling decisions.
- If you wish to generate income from your investments, opt for companies that regularly pay good dividends. These companies grow slowly but have strong roots and pay well in the form of dividends.
- If you have low-risk tolerance and wish to preserve your investment, stable blue-chip corporations are your best bet.
- If you can bear a certain degree of risk while chasing higher gains, you must consider companies in their best early growth years.
- Irrespective of the kind of investor you are, diversify your investments and build a portfolio that balances risks and returns.
Still confused? We at TejiMandi are a team of experts backed by years of investing and portfolio management experience. We give active advice to make long-term investments easier and more in line with your financial goals. Moreover, we offer ready-made portfolio options for you to invest in. Each of these portfolios is well researched and diversified. Our team actively manages the portfolio and rebalances it regularly to minimise risk and maximise growth.
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In conclusion
While keeping a tab on the latest happenings is extremely vital for any investor, taking information from news channels should be restricted to getting daily updates of the local and global events. Any direct advice regarding buying and selling your investments from the news may put you in losses. Before you make any decision, carry out proper research and analysis.
Experts at Teji Mandi help you on every step in your investment journey. To get stock recommendations based on proper research, download the Teji Mandi app.
