Buy the Rumor, Sell the News

The August, 2013 issue of Financial Insights from Thrivent Financial for Lutherans has an interesting article about speculative investing. The article talks about stock market participants who “buy the rumor, sell the news.”

According to the article, here’s how it works:

Suppose XYZ Corp. is known to be developing a new product that savvy outsiders think will be a winner. XYZ may not have released exact details of what the product will look like, how much it will cost or even when it will be available, but hype for the product builds. That’s when short-term traders, or speculators, buy XYZ shares. Then, when the product finally is announced, they sell. They reason that the product might be a bust or simply fail to match rumor-fueled expectations. The stock has already traded higher on those expectations, though, and the short-term traders are ready to cash out.

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