Have you ever noticed that stock markets tend to react to breaking news?
Typically, when something important and unexpected happens, stock markets will either go up or down, depending on the nature of the news.
As an investor, you may want to understand how this process works – so, here’s what you need to know about the news and the stock market.
What is the stock market?
Before we dive in, it’s important to define what the stock market is. Put very simply, it’s the place where people can buy and sell stock or shares. They’re essentially the same thing, and investing in them means buying a part of ownership in a company.
There are two types of stock markets: 'primary' and 'secondary'.
The primary market is when a company, looking to raise money, sells its shares for the first time to public investors. This practice is commonly known as ‘Initial Public Offerings’ (or IPO), and the purchase is often made indirectly through an investment bank that acts on behalf of the company.
Now, if investors want to sell the shares they’ve just acquired, they’ll need to go to the secondary market, where shares of companies can be bought and sold by secondary parties, whoever they are. Any profit made between these sales will go to the investors, not the company (or investment bank) who initially issued the stock.
When you hear people or the media talk about ‘stock markets’, what they’re usually talking about is the secondary market – and the same rule applies to this blog, by the way.
Now, let’s look a bit closer. Stock markets, or secondary markets, are made up of stock exchanges, which are themselves made up of individual stocks, which can be combined into indices.
Sounds confusing? Don’t worry, here’s an example to make things clearer. In the UK, you’ve got the London Stock Exchange, which manages a number of indices like the FTSE 100, where the shares of UK companies are traded almost every day. The FTSE 100 is made up of shares from the 100 biggest companies in the UK.
How do stock prices move?
So now that you know a bit more about stock markets, you may want to learn about stock prices.
The price of stock or shares on the secondary market is mainly determined by the forces of supply and demand. When there are more sellers than buyers, prices will drop – and vice versa. This means that when the the number of buyers exceeds the number of sellers, then prices will rise.
Typically, stock prices will fluctuate on a regular basis, and unless you have a crystal all, it’s impossible to predict where prices will land next.
So, how does the news affect the stock market?
The news can play a significant role in the investment world as it can provide you with key information to help you make investment decisions. For instance, every time a company releases its earnings report, you get some helpful data to decide whether or not to invest in it.
But it doesn’t stop there. The news can also affect the way you feel about a certain investment, company, industry, or market. In other words, the news has the power to shape and influence your emotions and opinions, which can drive your decision to buy or sell.
Take the Coronavirus pandemic, for example. In early 2020, Covid-19 was spreading fast and as a result, most countries decided to impose national lockdowns, forcing businesses to close and stop their activities.
Faced with gloomy news and uncertainty, investors were quick to panic and markets across the world crashed in March. Then, as governments announced exceptional measures to try and reduce the overall impact on the economy, investors became a bit less fearful and markets went back up.
Whilst it’s a good idea to always keep up with the news and get the information you need to make your investment decisions, it’s also important to put things into perspective and look at the bigger picture. The news is something that happens over the short-term, and although it can be distressing to see bad news unfold, it’s crucial to remain focused over the long-term.
What could you do when investing in the stock market?
You can’t control or change what’s happening in the world, but you can certainly change the way you react to it, and that’s key when you’re investing. So, here’s a few things you could do when investing in the stock market.
Control your emotions and ignore the noise
With social media and 24 hour news channels, it’s very easy to know what’s happening in the world at any time. However, it can quickly become overwhelming.
Being bombarded with news all the time isn’t always a good thing, especially from an emotional point of view – and the greater amount of news you consume, the more emotional you will feel.
Obviously, we’re not saying you should stop keeping up with what’s happening in the world – after all, if you want to make the most of your investment journey, you’ll need to have access to information to help form your decisions. However, you may want to be picky and meticulously choose what you read or watch, and how often you do it.
It’s also very important to try and stay calm – which is easier said than done, we know! The media will always dwell on bad news and may report things in a sensationalistic way.
You don’t have to listen to everything, and you can choose to ignore the noise. By selecting what’s important to you and your investment plan, then you can make the news a useful ally and act rationally in accordance with your goals.
Consider diversifying your portfolio
If you want to reduce the impact the news has on your investments, it could be worth diversifying your plan.
Generally speaking, the news will rarely affect every industry at the same time. For instance, whilst Covid-19 has had a terrible impact on travel and leisure, it has had a minimal impact – and in some cases, a positive one – on the technology sector. So, a way you could shelter your investments from potential swings is by spreading your money across industries, investment types and regions. That way, poorly performing investments might be balanced out by others doing well.
At Wealthify, we believe in the power of diversification, which is why we use investment funds (hampers full of investments) to build our customers' Plans to effectively spread their money across a range of different stock markets and assets, such as shares, bonds, and property.
Think about the long-term
When it comes to investing, you may want to adopt a long-term approach – because the truth is that there’ll always be bad news coming up, and as an investor, it’s important to accept that and learn to live with market swings.
Short-term movements and unexpected events can be extremely stressful, but by staying invested over the long-term, you could ride out the bumps and possibly help maximise your potential returns.
Many studies suggest that the longer you hold onto your investments, the better chance you have to make a gain. As an example, people who invested in the FTSE 100 for any 10-year period between 1986 and 2021 have had an 89% chance of making a positive return – and this timeframe did come with a lot of bad news!1
1: Data from Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Seek financial advice if you're unsure about investing.