What is Noise Trader?
A Noise trader is a person who trades based on gossips or rumors rather than fundamental or technical analysis of the stock. These irrational traders, therefore, take bets based on insufficient and erroneous data. Without them, the market would be descriptive and effective.
- James is graduated in science, and they don’t have sufficient knowledge and experience in the financial market. They bought some shares of Berkshire Hathaway for $ 3, 00,000.00 on 15/04/2020. Today he got the news that Berkshire Hathaway will have to pay the penalty to the government for non-compliance with the corporate act. He thought that its share price would fall due to adverse news of the company, and he booked the share price for $ 3, 10,000.00, which creates volatility in the market.
- Apple has earned a huge net profit, Mr. Martin is a noise trader and bought the shares of Apple, pushing its stock price higher side. After one hour of trading growth in share price is declined, and stock is closed on the lower price of open price. It is reflecting the stock’s volatility.
- Paul has 5,000 shares of Walmart, and they currently trade at $ 100 per share. If noise traders overreact to the bad news related to the company or country and let’s say the price dropped to $ 80 per share without any technical or fundamental justifications. This will cost the investors $ 1, 00,000.00.
Identifying Noise Trader
- These are those traders who trade on the basis of noise or rumor in the market. These traders are the opposite of traders, which trade basis having sufficient information, knowledge, fundamental and technical analysis.
- They invest in the stocks without advice/guidance of broker or stock expert.
- They can be retail traders, and they trade on an intraday basis.
- Volatility increases if noise traders start trading stock.
- They believe that they have special knowledge and information about the future price of the stocks and buy or sell the basis of available information.
- This impacts the market significantly because they do the trading on the basis of rumor news.
- It can increase or decrease the share price, which is not the actual, of a stock.
- They cause volatility in stock demand due to increased trading.
- These are those traders who take excessive risk and higher consumption of stock, which significantly changes the stock price.
Noise Trader Risk
- If a Noise investor takes the decision without having sufficient knowledge and experience, then there might be some chances that noise investors can book the loss on trading.
- It can affect the price adversely even when there is no certainty seems fundamentals and technical.
- The risk of loss on an investment/trading that arise from such traders.
The presence of noise traders is actually very critical for the feasibility of financial market-making. It can increase or decrease in profit or loss of other investors as well. It increases the volatility of the stock market. Decision taken by such traders can be correct.
This has been a guide to What is Noise Trader & its Definition. Here we discuss the examples of noise trader, impact, and risk along involved. You can learn more about from the following articles –