Investment analysts, economists and other market participants analyze anticipated news announcements, trying to second-guess the consequences of the news on pricing. Whilst they are unlikely to entirely agree on anything, they do generate a consensus that is useful. This consensus, containing the average estimate, allows traders to capitalize on price movements once the news announcement is released. This is because the average estimate will already be “priced into” the value of the share. We will explain how this occurs.
After their analysis, traders take advantage of anticipated movements. Rather than wait for the announcement they pre-empt the market. So, by the time an announcement is released, most traders have already taken a position.
When news announcements accord with average estimates, prices barely move. This is because the majority of traders have placed their trades. Yet, when news announcements differ from the average estimate, prices must adjust – either up or down – to accommodate the economic reality. This adjustment creates opportunities for the traders.