What are Noise Traders?

John Spacey, updated on August 06, 2023

Noise trader is a term for investors who buy and sell stock based on hype, biases, unconventional theories, misinformation and poor quality analysis. The term appears in economic research papers to explain the apparent lack of logic in the behavior of many market participants.

Noise trading represents a type of anti-information that makes it difficult to interpret price fluctuations. It can also represent an opportunity as noise traders may drive irrational prices in an otherwise efficient market.

Examples

A stock drops due to a popular post in social media that is factless banter.

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A stock initially goes up after an extremely negative press release because investors read the title but not the content and assume it's good news.

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A small cap stock rises because its ticker symbol is confused with a large cap stock.

Overview: Noise Traders
Type	Investing Economics
Definition	A stock trader who buys and sells based on biases, hype, misinformation and poor quality analysis to the extent that their trades are difficult to model with logic based on news about a company.
Implications	Noise traders raise risk levels as they are apt to act on rumor and hype. Noise traders cause price inefficiencies that can be profitable for sophisticated entities that can recognize such situations.
Related Concepts	Investing Greater Fool Theory Efficient Market Hypothesis