May 2011
Beginner to intermediate
384 pages
12h 28m
English
Content preview from The Handbook of News Analytics in FinanceBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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4.7 THE NEWS COMPONENT OF THE STOCK PRICE
The value of a company's stock is related directly or indirectly to the future earnings of the business. To be able to estimate the future earnings of a particular business, one would need to forecast either the growth or slowdown potential for the business and be able to quantify that. If the forecast indicates growth, then the stock price is likely to reflect an increase in value by a coefficient that represents a multiplier of the value of earnings per share; if the forecast indicates slowdown, the earnings multiple will probably decrease.
There is a lot of science that goes into an estimate of future earnings. The information that goes into the estimate is very likely influenced by the sentiment of the people who work on the estimate with regards to the future economic indicators, political environment, and so on.
The sentiment that is reflected in the earnings forecast calculation will find its way into the news cycle. When the news regarding the earnings forecast is released to investors, it will be perceived as material information, especially if it is coming from a reputable and influential research or media firm. The value of the earnings multiple is affected almost immediately and the stock price is adjusted to reflect a new valuation.
In today's online real-time environment, the news that carries material information affects the sentiment regarding the earnings multiple directly.
The sooner investors recognize that there is a ...
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