A few days back, shares of some recently listed companies crashed abruptly, some as much by 20 percent. These stocks had a good run post their listing. Brokers ascribed the sell-off to WhatsApp messages circulating in the market saying that the market regulator was considering to limit speculation in these shares by transferring them to the trade-to-trade segment. The ‘news’ was never confirmed or denied by the agencies but the stocks fell on very high volume, the damage was done.
At a time when computers are doing most of the trading, even the smallest news which can disturb the market equilibrium can cause a domino effect on a stock in particular or the market as a whole. Welcome to the world of ‘fake news’. Though it has been in existence for many years in various form, fake news gained popularity when US President Donald Trump highlighted it in his election campaign.
With the opening up of social media, every individual now has become a ‘journalist’. Random viewpoints are immediately circulated as genuine news. By the time fact checking reveals the truth behind the ‘news’, it has reached millions and the damage is already done. At times the media is caught on the wrong foot when social media points out that the facts are different from what is reported. However, in a generation where information is in abundance, it is very important to get the information and facts right.
In financial markets the damage is quantifiable. Prices react immediately to any information be it news or rumour. After all an old market adage is –buy the rumours and sell the news. The biggest problem is identifying a genuine story. Blogs by some analysts get circulated to prop up a stock. News is ‘leaked’ by sources only to be denied after price has reacted.
These ‘information’ are a problem for not only the retail investor but also institutional investors. It is a problem, not only in India but globally too. Globally, regulators are taking the battle very seriously and the market efficiency is at stake. Even in India we have the regulators and exchanges flashing notices to companies the moment they can link adverse price movement on high volumes to some news flow. Though this is the best that can be done by the regulators, retail traders and day traders are generally caught on the wrong side of such news flows.
Apart from news there are so called experts and analysts who are all over the media promoting some stock. While most might be genuine recommendations there are some who have vested interest in promoting stocks. But how can a retail investor prevent himself from such news and expert opinions. The expert opinion part is easy to handle. As an investor or a trader one should always have their own opinion, do their own research and verify every fact. As someone said, its only when you find no use of your own opinion do you pass it on to others as expert opinion.
As for news, there are some telltale sign to which can inform you if it is genuine or not. The purpose of promoting a fake news is either to profit from it or to cause a disruption in order to bring the price down to be able to buy it at lower price. In many cases where the purpose of the ‘news’ is to ramp up the price or increase participation in it, prices generally would have moved up by the time the news ‘appears’. Volume or activity would be more just before the news is out. An investor can easily check the price movement before reacting to the news, but importantly he should check the delivery data.
It is easier and cheaper to increase intra-day volume in a stock, but taking delivery of the same is a much costlier affair. A genuine move in the stock should generally be backed by strong delivery data.
Similarly, one can check the fundamentals of the company to justify the news flow. If there is news that a company is expanding its capacity or looking for acquisition, it is best to check if the balance sheet permits such an activity. If a news forward says that regulators are increasing the FII limit in a company’s shareholding, all an investor needs to do is check if the present limit are breached or not.
A little awareness and logical thinking can kill such rumours, the moment they appear. Exchanges and regulators do their job in promoting investor awareness, but self help is often the best help when it comes to protecting your hard earned money(The writer is executive director of Trade Smart Online)