Equities
Trading in equities may be in the actual instruments concerned or be achieved using options and futures contracts. Options provide a much greater level of gearing when they are trading close to being at-the-money than buying or shorting the underlying stock:
Fundamentals.Long-term investors look for opportunities to buy stocks that on the basis of fundamentals (earnings growth expectations, discount rate, risk) appear to be undervalued and sell or short stocks that are overvalued.
Rumors. Stock prices do move as a result of rumors, particularly if those rumors have some reasonable rationale. If the rumors are positive then stocks are likely to move up until a firm announcement that the rumor has no substance is made. It is easier for speculators to make money if prices are relatively volatile, whatever the cause, than if they remain largely static.
News event driven. There are a number of possible events where the timing of an announcement is known well in advance but the outcome is uncertain. Examples include the conclusions and recommendations of a competition inquiry, a change in tax policy, the announcement of awards for licenses or results of a bidding process. The market will price in an expectation of the outcome but if the result is opposite to that expectation the stock is likely to either rise sharply or correct.
Earnings releases are subject to brief but intense scrutiny. People who do not understand how stock markets work are perplexed when the stock of a company falls after it reports a good set of results with strong earnings growth. The market reaction to earnings releases depends largely on any differences between what the market was expecting and what the company actually delivered. Strong earnings growth can be disappointing if the market was expecting even stronger growth. Losses may be viewed positively if they are less than the market had feared. Analysts are frequently asked in the run-up to earnings releases if they are expecting any surprises. Remarkably, this is not quite as asinine as it appears.
Takeovers. Takeover bids can provide rich pickings for speculators. Friendly agreed offers may precipitate a hostile offer from a counterparty. Hostile bids will almost always be rejected and a higher bid demanded. Other stocks in the same sector will also be affected depending on whether the market believes a specific company is likely be the next target or bidder, or stands to lose or gain from the announced bid succeeding. Speculators may be able to sell their holdings in the target company to either the target company or bidder at a premium to market prices. The bid may be referred to regulatory scrutiny.
Indexation. From time to time the constituents of stock indices are adjusted. Some stocks are dropped from an index while other stocks are added. In the case of some indices the criteria for inclusion are very clearly defined, such as by market capitalization, and the changes are automatic. In other cases the index provider may have more leeway to act to try to ensure that the index is genuinely representative.
Traders will buy stocks they expect to be added to an index and sell or short those most likely to be dropped. They do so in the expectation that tracker funds will have to buy or sell these stocks after the index changes are put into effect.
Gray market. The gray market is an OTC market where new issues can be traded before opening on an exchange. Successful subscribers may prefer to take a guaranteed price in the gray market rather than sell in the market after the stock starts to trade. Traders will buy in anticipation of a higher opening price than that in the gray market. The time between the stock being traded on the gray market and on the market leaves the trader exposed to the risk of an overall market correction.