In attempt to gain an insight into the future movement of a certain company’s stock price, experienced equity traders will research and closely monitor the industries and businesses related to the stock that they have positions in. This is important, as news updates within a sector can quickly cause significant movement in the stock market, and may help a trader with future predictions of what and when to buy and sell.
However, a stock may not always move according to the trader’s expectations based on one piece of industry news. For example, if a company’s earning reports indicate a tough quarter with a dramatic fall in profits, a trader might assume that the stock price of that company would fall in sync with this news. However, if soon after, that same company announced its plans to carry out a sizeable share buy-back, there’s a fair chance that its stock price would soar, despite a bad quarter. Traders who only took the first piece of news into account could incur losses if the stock price moved in the direction opposite to the trader’s prediction.