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How do traders react when one company buys out another and what is likely to happen in terms of stock price?


There is no doubt that the world we live in could not function without the global brands we all love. From Reebok to McDonald’s and Amazon to Microsoft, the huge multi-national brands are now a part of how we act as consumers. They not only help us to enjoy life more and live in a more convenient way but also provide food to eat, cool products to enjoy, tech to work with and clothes to wear.

Global brands can also be very important when it comes to the world’s stock markets and for those who trade on them. That is especially true when a major brand buys out another company in a takeover move. This can make waves on the global financial markets and have a direct impact on trader’s behavior and the value of the stock.

But how does this all usually pan out when one company buys another?

How do traders react to news of a buyout?

The world’s financial markets are very sensitive to buyoutswhich means the traders who make up the market are too. A good tip for traders is to use the latest investment apps which keep you up to date with breaking stock market news, such as company takeovers. For a full list of the best apps to try, AskTraders is a reliable website to visit which brings together the best to consider.

Once reports of any buyout surface on apps like this, it can often cause traders to rush to sell or buy stock as appropriate. This can also happen before the buyout is even confirmed or takes place! If leaks of the takeover come out online or in the press, traders rush to make their move. The reason for this reaction is simple. Traders fear that any delay in buying or selling stocks could either cost them or see them miss out on a big opportunity. For these reasons, most traders are keen to hear about any buyouts as soon as possible and then take decisive action.

What affect can buyouts have on the value of stocks for each company?

When it comes to stock price behavior during a buyout, the value of both companies will see fluctuations. This will usually see one price rise in the short-term and the other’s fall. Savvy traders can use this information to place trades after seeing news of a buyout. But which stock usually rises, and which normally falls in price?

In most cases, you should find that the stock value of the buying company drops in the short-term. This is because this company might have to take on debt to finance the buyout or pay a premium for the selling company. By contrast, the selling company normally sees a short-lived rise in its value. This is mainly down to a premium being paid by the other company involved. Without this premium, there would be no incentive to sell and no motivation to complete the deal.

During a buyout, the acquiring company’s stock may also fall if investors believe the premium agreed is too high or there could be problems with integrating the businesses post-deal. It is important to note that the above market moves are normally only short-term. Over the long run, the acquiring company should see its stock price bounce back and rise to higher levels.

Is this always true for company buyouts?

As with a lot of things in life, there will always be exceptions to what happens during a buyout. This makes it vital to perform your due diligence before making any trades. If the target brand’s value dropped pre-buyout due to negative earnings, for example, then they may have to sell at a discount and not see any short-term rise during the buyout. In addition, the expected bounce-back post-buyout for the acquiring company may not come off if they do not manage the merger properly.

Buyouts can be chances to profit for traders

Whether it is Nissan’s new GT500 race car or Qatar Airways opening up new flight paths, top brands are always busy. Buyouts are a key part of this and will always remain important moving ahead. This is often seen when major global brands takeover small, independent firms. Of course, you will also see one major brand take over another! There is no doubt that the merest hint of a deal like this causes traders to behave in specific ways and that stock prices also fluctuate when buyouts are happening.

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