The Role of News in Fundamental Analysis
Jim Graham

Good trading decisions are always based upon good information - information that is accurate, significant, and timely.  But it can be difficult to trade on news.  News does drive the stock market in the short term, and the Internet has irreversibly altered the presentation of corporate news and financial reports.  Traders can now get immediate access to real-time news services, and those with both the time and inclination can closely monitor the news that is expected to have a significant effect on stock prices.

Stocks are generally priced efficiently, reflecting all the economic information and company news available.  That is not saying it is impossible to trade based on news.  Once an item hits the wire, those trading on news must analyze the content, weigh its impact, and then quickly make a decision to buy, sell, or do nothing.  Stock prices don't adjust instantaneously.  This can allow a trader to exploit opportunities when stocks have not yet adjusted to reflect the minute-to-minute news when it is announced. 

The Big Picture

To begin trading on news, you need to develop a framework to work within.  Good fundamental analysis includes educating yourself about financial principles and the economy.  The first step in every analysis is to understand current conditions and trends in the economy as a whole, as well as how the different industries are likely to perform.  For this step I like to read the weekly and monthly business and news magazines. 

It is true that much of the news in them is already old and already priced into the market.  But just because news is now immediately available 24/7 on the Internet doesn't mean magazines are no longer useful.  They still have their place and due to their publishing characteristics they luxury of being able to write in more depth on many subjects.  This kind of news vehicle is perfect for getting you to think about longer-term trends and help you develop the big picture.

The other reason to read magazines is that they act as a filter.  Even if all the news and information you need is available on the Internet, there is so simply so much available that it would be a full time job to try and read it all.  By focusing on the most important news and trends, magazines help to prevent you from suffering information overload.

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