What's Up With "Buy the Rumour, Sell the News"?

Apple Inc.'s newest iPhone, dubbed the "anniversary" phone, is here — a full decade after the first version was released into the world. It was preceded by numerous rumours about snazzy new features and price expectations. In this case, things like "Face ID" in place of the fingerprint reader, wireless charging, a swanky new camera and a price tag of around $1,000 were all hot topics of discussion. The day before the latest product launch, the company's shares closed higher in trading. In part, that's related to a phenomenon known as "buy the rumour, sell the news."

How Does It Work?

In short, the adage is largely rooted in the belief that stock prices often move higher based on rumour and dip when profit taking happens after the actual news is released.

Keep in Mind...

Humans are social animals, which means we can be easily influenced by the behaviour of others. When other investors start buying shares in a company, we'll often think it could be a good idea for us, too. It's often called the "herd instinct." Rumours around new product launches, mergers and acquisitions, or of a company going private, can temporarily spur investor appetite.

Hey, it's sometimes hard to sit on the sidelines watching a company's stock price climb and wonder why we're not part of the action. We can start to feel afraid of missing out on a possible good thing. This fear of missing out, or FOMO, can override rational thinking. That could mean we run with the herd and buy, even as the asset price continues to rise. That would be the "buy the rumour" side of the equation.

But what about the "sell the news" piece? If a new product release isn't all it's expected to be and demand ends up being lukewarm, or there's the realization that the stock price is overvalued, investors can flee. Sometimes, even if the news matches all the pre-event hype, a stock price can fall after the event as investors take profits on the earlier upward moves.

One never knows exactly what will happen until the news is formally announced.

So, if you've ever been tempted to "buy the rumour," a deeper dive into researching whether it's an investment that suits your portfolio and risk tolerance may be worthwhile.

This article was updated on September 26.