Why do some people believe anything they hear? Why do some people act on information without evidence? How can mere rumors and speculation affect financial markets? Something rooted in psychological bias creates ripple effects that not only affect individuals, but entire markets.
Financial markets especially are based on information. Investors utilize information  in decision making and try to benefit from future events. They  aim to acquire assets that guarantee the most income in the future with the highest certainty. This leaves them susceptible to rumors “unverified accounts of explanation of events” (Gist, 1951). They are not a new phenomenon, but with the internet boom it has grown.
Fake news can cause stock drops before companies manage to intervene. AI generated images can induce panic selling. A recent example being the fake image of the Pentagon in flames sending the American market in disarray. While the picture was quickly identified as fake, it had real consequences on the market (Alba, 2023).

Despite these developments more people invest than ever before. Ease of access provided by traditional banks and cheaper brokerage markets that offer no-fee trading make it easy to start (Spear, 2024). Even cryptocurrencies are heavily speculated on. Unlike other currencies, many people hang on to it like an investment and attempt to sell it for more in the future. While this is not how currency is usually used, its rises higher every year so it is a good strategy. But does its value rise due to its underlying value, or is this just a massive number of people speculating on its future value that drives up the actual value? How should investors act on this type of speculation? What should investors do in the face of uncertainty, and what to do if rumors turn out to be true?

How do rumors spread?

Rumors  have many sources. Most commonly they originate on obscure social media accounts that misinterpret media statements, or established influencers that promote a bad product. But these rumors are not in the public eye, and barely affect any stock. If they stay unnoticed they fade quickly over time, not affecting anyone else (Hickey, 2021).

But especially with social media these small rumors gain traction. Misguided intent, or trend chasers can cause news outlets to pick up a story and it “goes viral” (Hickey, 2021). Now  investors are suddenly be faced with a new rumor that may be true. They are in environment of FOMO, where they worry that they may miss important developments, and herd mentality, where people quickly conform to the behavior of the majority. It is easy to follow the crowd and join the trend (How to beat investment FOMO, 2025). But investors should avoid irrational behavior and not make impulsive decisions based on market buzz.

The impact of rumors

While social media and news outlets run fast with unverified information, companies often take hours or days to respond. A commercial stock can quickly bounce back after concerns are quelled, but in the meantime the price drastically fluctuates, giving opportunists a way to make a quick buck. But the main impact of rumors comes from the hit in confidence, affecting the reputation and goodwill of companies (Drew, 2019). These effects are not confined to single stocks either. They can spill over into different markets, causing ripple effects in entire economies (Wenting Zhang, 2024).

Despite these dangers even established financial news outlets tend to speculate. Entire businesses are build around speculation on how central banks will manage interest rates. Central banks have started to rely on this, using forward guidance to signal upcoming changes in monetary policy, allowing for a smoother transition to these policies (What is forward guidance, 2022). But if signals are read incorrectly or the central bank has to divert from its strategy it can tank the entire economy and cause inflation spikes (Jeffrey R. Campbell, 2019).

Emerging markets are especially susceptible to speculation. These markets depend heavily on investments in their growing economy (US Dollar Funding and Emerging Market, 2022). Rumors that impact investor confidence can devastate the macroeconomic performance of these markets, and a sudden currency devaluation can cascade into capital flight, where investors move their money quickly out of the country due to the weakened economy. But this further weakens the economy and currency which further devaluates the currency and makes even more investors move out of the country, leading to a self-fulfilling prophecy (Joao Ayres, 2024).

A classic example of the dangers of speculation is the 2008 financial crisis. It had a devastating impact on the global economy. US Banks attempted to capture short-term profit by issuing high-risk loans that could not be paid back. Investors bet that housing prices would grow indefinitely (Gratton, 2024). However when prices began to fall rumors spread that the banks could no longer meet their debts, and confidence in the banks disappeared. Customers withdrew their deposited money in droves, weakening the financial stability of the banks, as well as the whole US monetary system. The stock market collapse that followed required the government to intervene with massive bailouts to prevent the entire system from failing, by injecting capital into the banks and holding them up to restore stability (Gratton, 2024). The effects of the rumors and speculation that led to this crisis is the reason why the US introduced strict oversight of banks, holds continuous tests to ensure their financial stability, and restricts the speculative trading activities (Gratton, 2024).

A more recent example of speculation is the GameStop short squeeze. As mentioned earlier, nowadays many more people can invest through the internet nowadays. A group of these non-conventional investors gathered on social media platforms to buy GameStop stocks. The groups noticed that many hedge funds heavily shorted the company’s shares, meaning those funds speculated on the failure of GameStop (Li, 2021). Private investors, however, speculated that GameStop was undervalued and leveraged stocks, meaning they bet on the success of GameStop. Through coordinated purchases the price of the GameStop soared; the hedge funds had to pay up to twenty times as much for each stock as they originally intended to buy (Li, 2021). While an impressive win for the retail investor, it was still driven by speculation and shows the volatility that accompanies it.

The most well known subject of speculation is the crypto environment. Every few years the crypto market has a new fad, from “shitcoins,” to crypto gaming, and most recently NFT’s, the market is filled with rumors and speculation (Khalaf, 2017). Investors eagerly wait for the next Bitcoin, and numerous developers have their own ideas on what alternative coins need to finally be relevant to the larger monetary system.
While traditional financial institutions have a hard learned history that led to regulations and transparency, the crypto environment is unregulated by design and considered one of its boons. But this also allows for speculative behavior to run rampant (Prasad, 2022). There are many tales of investors being swindled, but just as many becoming rich over night. Furthermore, current cryptocurrencies cannot replace conventional money, as many are deflationary by nature motivating people to hold it rather than spend it. Yet the value of Bitcoin grows at a rapid pace  as people expect it to become a majorly used currency. This logical inconsistency due to speculation poses an interesting ongoing case study. Especially now that the American presidents intends to legitimize crypto currency, causing yet another leap in Bitcoin value (Teresa Xie, 2025). But, as is common in the crypto market, there are little concrete plans on how crypto will be legitimized, forcing people to rely on speculation and rumors.

How to navigate the noise

It is always difficult to fully compensate for misinformation and fake news, especially as the actions of others can influence your own investments. But investors can still take countermeasures to mitigate their impact.

The most effective tool is to critically evaluate new information. Verifying sources with reliable news outlets grounds an investor. Keeping an overview of investments and examining social media platforms to stay aware of the latest rumors will help in understanding where speculation will move and improves financial literacy.
Another simple tool and common advice is to diversify investments. While entire markets can be affected, when one sector falls, another rises.

Ultimately rumors and speculation will always be part of the markets, whether they are intended or unintended. They can lead to quick gains or introduce significant risks that can destabilize entire economies.

Fortunately, the key to navigate this environment remains simple. By relying on reputable sources and staying objective investors can remain stable. Through diversification they can further reduce market fluctuations and gains stable long-term profits. Informed decision making processes are the best defence against rumors and speculation.