Why do shares fall on good news?
On 23 April 2018, HDFC bank announced its Q4 results for the year 2017-18. The net profit in the March quarter stood at Rs 4,799 crore, up 20% on a year-on-year basis (y-o-y).
Good news for the investors. Right?
And bam!! Next day the share price fell -1.03%.
Why did this happen? Why do shares fall on good news?
This is one of the most common questions asked by the stock market beginners.
In this post, we are going to discuss why do shares fall on good news? Why a good news may not always be a good news for the investors?
Let’s first understand the basics. Why stock price fluctuates?
We all know that stock market works on demand and supply. If the demand of a stock is greater than the supply, then its price will go up. On the other hand, if the supply is high and the demand is less then the share price will fall.
Further, the reason for increase/decrease in the demand or supply of a stock depends on a number of factors.
For example, negative news like bad earnings reports, failed products, resignation in top-level management, lawsuits etc can decrease the demand for the stock which will further lead to the decrease in its share price.
On contrary, positive news like increased earnings report, favorable government regulations, significant dividends, bonus etc can increase the demand for that stock and push the price high.
Besides, the reactions for some news might depend on the interpretation. For example, during mergers and acquisitions, the public need to figure out which company will get more benefits- Acquiring company or the target company. And the share price of that company will move accordingly.
Overall, the price movement seems simple, right?
However, the share price movement is not always that straightforward. There are many things happening underneath that you need to understand as they might the driving the prices.
Why do shares fall on good news?
Good news may not always be good for the shareholders. There can be a couple of situations when good news can be a bad news for the investors.
So, why do shares fall on good news? One of the simplest factors can be the phase of the economy. Whether the economy is in expansion phase or contraction phase right now?
For example, if the whole economy is going down- globally or locally, then it might be dragging the stock down in spite of the good news.
This can be easily understood, right?
Nevertheless, many a time market is good and the economy is doing perfectly. Still, the stock goes down after a good news. How to explain such scenarios?
Here, the reason for that stock to go down maybe stock specific (and might doesn’t have to do much with the economy).
Also read: Why do stock prices fluctuate?
Here are few reasons why stocks may fall on good news.
— When earnings report does not meet the expectations.
If you go to yahoo finance and enter a stock- you can find the estimates by the analysts. It’s inside the ‘analysis’ section.
Source: Yahoo finance
Here you can read the quarterly and yearly estimates by the analysts regarding the company’s earnings, revenue, growth etc.
There are a couple of more similar websites where you can find the estimates by the analysts.
Anyways, coming back to the original question- Why do shares fall on good news?
The stock price may fall if the company is not able to meet these expectations.
For example, if a company/management forecasted its next quarterly EPS to be Rs 40.
However, the analysts are expecting the EPS to be Rs 45.
Now, in next quarter, the actual earnings turn out to be Rs 42.5. Then it’s good, right? Better than what forecasted by the company.
However, here the price may fall as it doesn’t meet the public expectations.
Conversely, if a company posts loss in a quarter, but the loss is less than what expected by the public, then the share price may go up.
Here, whether the price will move up or down depends a lot on the actual report vs the estimates.
— Future expectations
The stock market is all about the future expectations. Current or past ‘good’ news is good for the investors but the comments about the future can easily scare them (no matter how good was the past).
For example, suppose you got your electricity bill today where the total bill turns out to be Rs 1400 (which is way less than the last month). Good, right?
However, you also received a notice that the ‘price per unit’ is going to significantly increase from next month.
Here the current news is good but the future is scary and hence instead of celebrating, you might be worried about the next month electricity bill.
In the same way, if a company announced a good result for the last quarter. However, in the same quarterly report/announcement, they also highlighted some issues which might affect the profitability of the company in upcoming months/years.
In such scenarios, instead of enjoying a good result for last quarter, the shareholders might take the news adversely and it may lead to a fall in the share price.
Also read: What is the Right Time to Exit a Stock?
— Missing parts
Sometimes the stock price of a company may even fell after a good news because of something announced/reported in the annual/quarterly report by the management/board of the directors of the company that you ‘missed’.
For example, the board of directors saying something negative/fearful regarding the future or some setbacks in the quarterly/annual report which you missed to read/notice.
Here, something is hidden underneath the big positive news that scares the people.
For example, if we go back to the original discussion that we started at the beginning of this article-
“HDFC bank announced its Q4 results for the year 2017-18 where the net profit in the March quarter stood at Rs4,799 crore, up 20% on a y-o-y basis. And the share price the share price fell -1.03%.”
If you read the report, you will find that although Q4 result was good, however, HDFC Bank’s unsecured loans have grown at a rapid pace, and the home loan segment hasn’t grown much. And these trends may cause some concern for the investor. That’s why HDFC Bank’s share price fell a little next day.
Read more here: HDFC Bank Q4 Profit Up 20%; Asset Quality Remains Stable- Bloomberg
In short, if the stock falls down on good news, there can be some part that you missed which might be scaring the people.
— Noise Traders:
With the boom in online trading, the noise trader has increased a lot over the last decade. They are those traders who sell on technicals i.e price trend and momentum.
Here, they simply copy what the others are doing. They do not analyze the fundamentals of the company but make their trades based on news/technicals.
For example- in scenarios of sell-offs in a stock due to whatever reason, these noise traders will sell their shares too and leave their position.
Many a time, noise traders drag the share price further down.
Also read: 7 Types of Risk Involved in Stocks that You Should Know.
Few addition reasons why shares fall on good news –
The market anticipates the results and prices already starts adjusting before the actual announcement. This simply means that before even the company announces its result, the market might be anticipating the outcome and hence, the prices might already by rising high before the announcement. As the prices keep rising since past few days/weeks, it might take a little rest/correction on the day on the result and the share price may fall a little.
Profit booking by the early investors: Many investors who might be holding the stock for a long time, may opt to book profit on the good news. This may further push the stock price down.
How should you react in such scenarios?
If the stock is fundamentally strong, hold the stock despite the stock price going down. It won’t matter much in the long term if the company. Most of the great companies focus on their long-term goals. This means that few times, they might miss the short-term expectations.
Although, short-term concerns shouldn’t be ignored completely by the company or investors. However, if the company is overall performing good in the long run, then there’s no point of worry. In any business, there will be few setbacks in the short run.
Besides, do not get attached to the short-term expectations. Analysts will keep on making expectation every quarter. It’s their job and this is what they are paid for. If a company keeps on working for the short-term goals, it might never be able to focus on the long-term growth.
Overall, if the temporary setbacks are not going to affect the long-term profitability of the company, then ignore the short-term fluctuations and hold your stock ‘tightly’.
New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.
TAGS: Why Do Shares Fall on Good News, how earnings affect stock price, Why Do Shares Fall on Good News on earnings
Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.
Start Your Stock Market Journey Today!
Want to learn Stock Market trading and Investing? Make sure to check out exclusive Stock Market courses by FinGrad, the learning initiative by Trade Brains. You can enroll in FREE courses and webinars available on FinGrad today and get ahead in your trading career. Join now!!