The market theory states that news is moving the market prices through investment decisions. However, there are huge differences between two news from the aspect of trustworthiness and their public announcement. The two opposite ends of the scale are the official announcement of facts and the spreading of rumours.
Individuals organised into groups based on a common interest can be easily manipulated and influenced. Manipulation is further intensified when information comes from people, groups, or institutes with authority and reliability on the market. Furthermore, media plays a significant role in transmitting the news. Due to the increased speed and scope of the spread of information, stock exchange processes are changing more rapidly, and amplitudes are stronger now than ever before.
The main problem is that nobody is able to determine whether the news will have positive or negative impact on the price of the firm’s shares. One part of the investors may think it is good news and long on their positions. In the same time, other investors may interpret the very same information as bad news and go short. This situation leads to big jumps in the market prices in both directions, and the movement of the share price becomes totally unpredictable. The stock exchange may suspend all trading with the given share in order to protect investors if one piece of news may induce a huge fluctuation in market prices of a share. This practice usually happens when specific bad news concerning a firm leak and the impact is not obvious or would not grant enough time for the firm to react to the news officially in a public announcement.
The exact time of the “birth” of a narrow group of news can be known in advance. These have the same impact as unexpected news, but at least the firm has the chance to prepare for it. Examples include when a firm announces a strategic decision influencing its future, the announcement of a new product, or other business plans announced publicly.
As the famous phrase says: "buy the rumour and sell the news".