The Effects Of Current News In The Financial Industry

All types of finance jobs relate to current events. Whether you are a mortgage broker issuing loans at the current interest rate or a stock dealer working on Wall Street buying and selling shares, your job revolves around the current market. However, perhaps you are just like me trying to decide what companies to invest in. Knowing that all financial jobs respond to current events, you should understand the importance of what state the current economy is in. How the overall economy is doing will cause all financial jobs to strategize their planning accordingly. Since financing refers to managing money for the future, current events and how they will forecast the future will play a large role. For example if the economy is prospering, society as a whole is making more money. When society is making more money, people tend to have extra cash to spend. Therefore, when people have more money to spend they will buy more goods, giving companies more business. In this particular state of an economy, companies are given more opportunities to invest their extra cash flow into new projects. If these projects are viewed by the public positively, the value of the company rises reflecting in its stock price. This is an important idea to realize when choosing companies the right companies to invest in.

Another idea to realize about investing your money in the stock market is how expected market news differs from actual market news. The stock market has hundreds of analysts predicting the economic state of participating companies in the market. Because the majority of investors believe or have the same predictions as professional analysts the stock prices are adjusted to these predictions. Therefore, when these expectations are wrong the market can fluctuate rapidly, increasing or decreasing stock prices based on the difference between what actually happened and what was predicted.

Let’s look at one of the companies I am currently a shareholder of, Facebook. On Tuesday night Facebook announced its 2012 Quarter 3 earnings which were higher than analysts expected.  Sure enough Wednesday morning when the stock market opened, Facebook's stock increased to nearly 20%. According to Before It News, "The social networking company said that it now has 1.01 billion users on its network and had earned $1.26 billion in revenue this past quarter, about a 32% increase over Q2 and almost 100% increase over the same time last year." This announcement was great for shareholders of the company. I have owned the stock for about 3 months and this was the greatest increase the stock has had. Check out the graph above, showing Facebook's stock price for the last three months. Notice its closing price on Tuesday before Facebook's announcement. Then Wednesday morning after the news its stock price sky rocketed. Therefore, as you can see the stock market is affected by current events that differ from the markets predictions. You see according to the Outline of the U.S. Economy by Conte and Carr, "In general, economists say, they (stock prices) reflect the long-term earnings potential of companies." After this announcement the stock price went up because analysts had undervalued the success of the company. Facebook has done better than analysts expected, showing their future is brighter having more cash flow.

I've mentioned that all financial professions are impacted by current events. However, since I've been currently researching stock brokers I want to emphasize their relation. Because one of the main skills a stock broker must have is a strong clientele relationship, he must be able to understand the effects of current events. For example, a good stock broker having done the research should have been able to realize that Facebook was going to announce their 2012 Quarter 3 earnings Tuesday night. Therefore, this broker should have predicted the outcome prior to the announcement to help his clients decide whether to invest in Facebook or not. If the broker had realized Facebook was going to inform everyone like they did, he should have informed investors to buy shares on Tuesday. This would have gained investors 20% on their investment in one day! However, it’s easy to speculate after the fact about what your broker advised. All they can do is give an educated guess as to what is going to happen. Check out this video below from the movie the 25th Hour. This entertaining clip demonstrates how brokers predict the market. However, keep in mind this broker is looking after mutual funds where he is in charge of picking the investments for his clients. This is not a job all brokers have.