CandleFocus Glossary Editor
Headline risk occurs when a news story – especially a negative news story – adversely affects the price of stock. Financial markets have a tendency to react quickly, sometimes even before there is any hard evidence or details available. An example of this can be seen in elections and Brexit-style referendum votes, where the market will sometimes drop or rally greatly in anticipation of an outcome that has yet to be decided.
Headline risk primarily affects individual companies more than sectors. For example, one company may suffer a crisis due to a barrage of negative headlines, while the sector it belongs to remains largely unaffected. Similarly, sensationalised news stories like a natural disaster, scandal, or legal action can drastically affect stocks, while the broad markets largely ignore them.
In many cases, headline risk is more perception than reality; once a market has digested the news, prices may return to what they were before the headlines. For instance, news stories about a CEO's embarrassing comments may send a stock tumbling initially, only for it to rise again shortly afterward.
Headline risk can be limited by adopting a long-term investment strategy and ignoring short-term fluctuations from the markets. Investors should always remember the markets are volatile and that any information, including headlines, should not be taken at face value. Additionally, companies and investors can work on their public relations campaigns to ensure news stories are fair and let potential investors know the reality of the situation.
All in all, understanding and managing headline risk can be a very difficult task for investors and companies alike. Unexpected and irrational news stories have the potential to move markets and cause short-term volatility. Investors should view headlines with a degree of caution and evaluate news stories in terms of how it actually affects their portfolio in the long term. Companies, meanwhile, can help mitigate headline risk by becoming more transparent, engaging more actively with the public, and proactively responding to news stories.
Headline risk primarily affects individual companies more than sectors. For example, one company may suffer a crisis due to a barrage of negative headlines, while the sector it belongs to remains largely unaffected. Similarly, sensationalised news stories like a natural disaster, scandal, or legal action can drastically affect stocks, while the broad markets largely ignore them.
In many cases, headline risk is more perception than reality; once a market has digested the news, prices may return to what they were before the headlines. For instance, news stories about a CEO's embarrassing comments may send a stock tumbling initially, only for it to rise again shortly afterward.
Headline risk can be limited by adopting a long-term investment strategy and ignoring short-term fluctuations from the markets. Investors should always remember the markets are volatile and that any information, including headlines, should not be taken at face value. Additionally, companies and investors can work on their public relations campaigns to ensure news stories are fair and let potential investors know the reality of the situation.
All in all, understanding and managing headline risk can be a very difficult task for investors and companies alike. Unexpected and irrational news stories have the potential to move markets and cause short-term volatility. Investors should view headlines with a degree of caution and evaluate news stories in terms of how it actually affects their portfolio in the long term. Companies, meanwhile, can help mitigate headline risk by becoming more transparent, engaging more actively with the public, and proactively responding to news stories.