Media Effect

What Is the Media Effect?

The media effect depicts how certain accounts that the news or media distributes may influence as well as enhance current price trends in a specific asset class, sector, or overall market. In the event that this theory turns out as expected, subsequent to perusing a headline or article, investors or borrowers will more often than not be influenced by headlines and answer rapidly to the news.

The media effect is in many cases found in stock prices connected with earnings changes and in the mortgage market when prepayment rates can strongly increase following specific reports about the economy.

The Media Effect Explained

The media effect proposes that accounts in the media will help or damage a company's business and its share price. With the 24-hour consistent pattern of media reporting and social media intensification, no company is safe from headline risk. For instance, fresh insight about the Fukushima nuclear crisis, in 2011, rebuffed stocks with any connected business - even however they were distant from the accident itself - from Australian uranium diggers to U.S. nuclear power plant administrators. Headlines about earnings, legal and regulatory action, or insider activity can rapidly impact the share price of a company.

The media effect likewise operates in lending markets. A few financial experts attribute increases in the number of refinanced mortgages during low interest rate periods to headlines enumerating a drop in interest rates and how this connects with mortgage costs. The individuals who read these articles are probably going to increase the prepayment rates on their mortgages and refinance in like manner. Investors likewise noticing these trends could take positions in view of the immediate release of the news, expecting the increase in refinancings.

Well known news services that numerous investors watch incorporate Barron's, the Wall Street Journal, the New York Times, Bloomberg, Seeking Alpha, Quartz, and that's only the tip of the iceberg.

The Media Effect and Trading Strategy

Numerous fundamental investors spend a great deal of time exploring and discussing the decision about whether to take a position in a specific security. Here, the media effect is all the more closely associated with short-term trading strategies. Rather than buying and holding a specific company or asset class for a delayed period of time, investors that stick to the media effect could buy and sell a specific security inside a one-day or one-week time span. For instance, in the event that the Wall Street Journal runs a negative story ahead of a high profile company like Tesla's (TSLA) earnings results or prior to the rollout of another technology update, investors could short TSLA stock.

Shorting includes borrowing company stock from a broker and immediately selling the stock at the current market price. Proceeds from this sale are credited to the short seller's margin account. At a future time, the short seller will then cover the short position by buying it in the market and reimbursing the credited stock to the broker. The difference between the sale price and the purchase price addresses the short seller's profit or loss.

For instance, accept that TSLA is trading at $300 per share, and an investor accepts the price will decline in the close term as competition has increased. The investor may "get" shares from a broker, and sell them at the current price. At the point when a contender emerges with a comparable energy efficient vehicle model, and TSLA price drops to $290 as anticipated, they can then purchase the shares back and return them to their broker for a $10/share gain.

Highlights

• In lending markets, borrowers answer headlines about economic activity and interest rate changes, modifying prepayment and refinancing behavior.
• The media effect alludes to the influence that headlines, reports, and social media play in impacting investor or borrower decision making.
• Stock prices can rapidly go up or endless supply of a positive or negative story, individually, giving investors headline risk and giving informal investors opportunities to create short-term gains.