Question

Why would the rumor of a government contract change the value of this companys stock

Answer 1

The correct answer is: "The value of the stock will INCREASE".

If the rumor is confirmed and a goverment contract is signed, it means that the company has been hired to provide a certain predetermined amount of a product or service. Hence, such contract ensures a certain amount of sales and profits and, as a consequence, potential investors would increase the demand of stock from the company because they expect (from a very reliable source) that the firm would be able to pay good dividens derived from the goverment contract. This would increase the value and market price of the stock.