Rumour Has It, Stocks Are Affected…

Dr. Clemen Chiang
Dr. Clemen Chiang

Even with all the technology driving today’s trades, there’s just no overlooking the human element of stock market trading. Perhaps among the most telling indication of this is the effect of rumourmongering on the performance of certain stocks. Whether they have been verified or not, rumours have been shown to affect stock prices.

In this post, Spiking takes a look at what rumours actually are and what influence they have over stocks. We’ll also check out a few examples of stocks whose performance changed after rumours about them spread. We’ll see what the Singapore Exchange has to say about rumours, as well as what investors ought to do when the rumour mill starts working.

Rumours As Market Meddlers

Rumours are defined by as stories or statements in general circulation without confirmation or certainty as to facts. This immediately differentiates rumours from financial news stories, which generally come from trusted, confirmed sources.

Information you gathered from Bloomberg or the Straits Times, for example, would be far more credible than something you overheard from acquaintances at a party. It would be well to note, however, that just because a story came out in the press, does not automatically mean it is true. Official statements made directly by the company in question might therefore be more reliable.

TradeKing, which refers to rumours as “unofficial news”, describes the effect of rumours on the market as anticipation. When unofficial news spreads, stock prices change in anticipation of the confirmation or denial of the information. If it’s bad news, for instance, stock prices may drop. If the bad news was disproved, the stock could soar accordingly.

This effect might be explained by the fact that while the platforms or systems in place for trading are automated or computer-run, the brokers and investors doing the actual buying and selling are human. As such, they can’t help but react to rumours whenever they hear them, even if the sources of the information prove questionable.

Rumours Affected These Stocks

SciELO Brazil came out with a paper discussing how rumours affected shares of Brazilian petroleum company, Petrobras on the São Paulo Stock Exchange from 2007–2011. The paper showed that it was the reactions of the company (also composed of humans) to rumours that caused its stock prices to fluctuate.

These rumours included pre-salt oil reserves, oil discovery and production, and speculation as to Petrobras’ investments. Petrobras responded to these rumours by providing clarifications which were available on the stock exchange website.

Another example of a stock affected by rumours is Herbalife in 2012. G. Hudson on Seeking Alpha describes how certain managers use rumours to affect stock prices. In the case of Herbalife, he says, information was spread in order to make the company appear doubtful in the eyes of investors and stockholders. The rumourmongering formed part of efforts to push Herbalife stock prices down.

What the SGX Says About Rumours

Rumours have dangerous effects on the market, maintains Andrew Ross Sorkin on Deal Book. It is because of this that the SGX has covered rumours in its very own rulebook.

Under its Corporate Disclosure Policy, Appendix 7.1, the SGX says that a company may be required to clarify or confirm a rumour, if the establishment of a “false market” is to be avoided. The SGX defines a false market as a condition that may exist if information, in the event that it is withheld, could very well influence investors’ decisions on whether or not to buy or sell certain securities.

The SGX devotes Part VI of this Appendix to Clarification or Confirmation of Rumours or Reports. It says that any information, whether disseminated by the press, a broker’s letter or word of mouth, true or false — as long as it affects stock prices and investors’ decisions — must be clarified or confirmed promptly.

The SGX requires a “frank and explicit announcement” in the event of information leakage. It likewise stipulates that any erroneous announcements made should be made known to the party that made it to begin with (such as a newspaper or a broker). Any developments arising from such announcements have to be made publicly, even if this causes business inconvenience.

How Investors Should React to Rumours

Investors shouldn’t get advice from the grapevine in the first place — Spiking has said as much in a previous post. But seeing as it is well-nigh impossible to remain impassive in the face of stock market hearsay, we share herewith some tips from Sowmya Kamath on Money Today, for how investors can deal with rumours.

1. Think twice about the stakes. If the rumour is about a company selling its stake in another company, or that another company is buying a stake in it, take care. See if the company’s stock price changed before news of the sale of its stake came out.

2. Sell in the event of a scam. If the rumour is about the management of a certain company misusing its funds or is involved in a scam, it might be better to sell your shares. Note that while it is difficult to confirm rumours like this, they could cause a negative chain reaction in stock prices.

3. Raise questions about fund raising. If you hear about a company’s plans to raise funds, try not to get all excited about how such rumours tend to make stock prices go up. Try to find out how the company is going to raise funds: Will it use debt instruments or a private placement of equity shares? Also try to get an idea of how other companies went about their fund raising.

4. Scope out shares to be pledged. Rumours like this usually send stock prices down, and generally put investors on their guard. But step back and take a look first at whether the stock price had been going up till then — if it had, then all is well. If, however, the stock price had been sinking, try to find out if the company is having a hard time raising funds. If it does, you might want to let go of its shares for now.

5. Don’t decline de-listers. If you hear about a company that’s planning to de-list, try to check out its fundamentals, first. If they’re good, it’s still a good idea to invest if you’re a long-term investor. If you see that the rumours have a negative effect on the fundamentals of the company, it would be better to not invest.

Focus on Facts, Not Rumours

Spiking was founded in reaction to the investor practice of basing investment decisions on rumours or speculation. In place of unconfirmed reports or mere hearsay, Spiking offers investors verified information sourced straight from the SGX. By using the Spiking app, investors are able to make decisions founded not on gossip, but on fact.

Spiking enables investors to get up-to-the-minute updates on every stock spiking at the SGX. Investors are apprised of the buying and selling activities of more than 11,000 sophisticated SGX investors, and can take investment cues from there.

Find out how you can become a better SGX investor with verified information from Spiking. Visit the Spiking app homepage now.