Why do stock prices change dramatically in value within seconds after release of financial results? After all, it is impossible to analyze such a large amount of information in such a short time.
In: Economics
The investment banks and funds all have teams of analysts who spend all day evaluating these companies, their performance and future outlook, and from that estimating what the stock prices should be and what thresholds the funds should use to buy and sell stocks.
Ahead of a major earnings report they’ll have run analyses on a range of earnings values and what they think the impact on stock price will be. Those analyses are preloaded into trading algorithms ahead of the announcements and basically provide a series of IF-THEN instructions to execute immediately upon release. These algorithms can process the results and initiate trades within microseconds, allowing for almost immediate stock swings after news comes out.
A similar, albeit slightly slower and less automated, process plays out with individual traders. Everyone planning to trade on the news will have some idea where they expect the earnings to be and a plan for what to do if the results are above/below the expected – it just takes them seconds/minutes to initiate the trades.
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