You might think that stocks should move more on news than rumors, but that's often now the case. History has shown us that rumors or vague announcements can also have major effects on a stock's price.
Consider, for example, Amazon.com (NASDAQ:AMZN), which reported in 1999 that the next day it would make a big announcement. Immediately, its shares rocketed ahead more than 20%. Then, the next day, after the actual announcement (that it would begin selling home improvement items, video games, software, and gifts), the shares quickly lost half that gain. Apparently investors were expecting more earth-shattering news.
Stocks often move on nothing more than rumors. And, once the stock price begins moving northward, more people tend to jump into the fray, pushing it higher. By the time the news is revealed or the rumor confirmed, a re-evaluation of its likely impact on the company often results in an adjustment downward in the stock price.
That is the source of a well-known Wall Street maxim: "Buy on the rumor, sell on the news." As Fools, we don't follow that maxim, but if you ever hear someone say it, now you'll know what they mean.
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