You can rarely be certain why share prices rise and fall. In the basic logical argument—the simple answer for a rise in price is that ‘there are more buyers than sellers’ and a fall in price is because “there are more sellers than buyers”. But, generally there is more into it than this, for example what causes more buyers than sellers and vice versa?
In the past few weeks we have been discussing fundamental factors that influence share performance. We covered factors such as demand and supply and how these market forces factors affects prices of listed shares, we also discussed how economic variables i.e. GDP, inflation, interest rates and exchange rate affects fundamental performance of the listed companies share prices. Today, we will focus on how company news affects market prices, read on:
Listed companies, are required to comply to their continuous listing obligations, one of which is the requirement to publish at least after every six-months their financial performance. For banks, it is every three months.
These reports indicate whether companies are growing (or not) their incomes, whether costs are up or down, whether the company is making profits. Through such reports analysts may comment on how they expect the company to perform in the future.
Reacting to news
The stock market is ravenous and craves for information, the continuous disclosure requirement for companies ensures a constant flow of news about all aspects of company operations from economic, to political, to geo-political and geo-economic, to social, even scientific and discovery news.
Any news that affects company earnings influences its share price i.e. – a company won new supply contracts; a technological breakthrough that suggests profit growth; a mining or oil & gas company won a new exploration licence or a discovery about new exploration or commercialisation of their discovery/exploration; executing a new strategy; a change of the top management; a new regulatory framework. All these news has to be weighed and evaluated as to how it will affect the earnings and the return on shares. The stock market may react either way depends on the news.
Breaking political news
Political events/news have significant effects on share prices — why? because politics or government determine policies that can benefit or hamper investments and returns. Additionally, political decisions impacts taxes, which impacts investment promotion, business expansions, etc. For example, the government may lower the rate of taxes, this may increase share prices because it means a lower tax burden, hence increased earnings. Investors can’t ignore political news, which hinges on changes to legislation. Virtually every company has something to fear or to gain from the government and its regulatory agencies.
Generally, any company listed on the stock exchange is up for sale. Another company or group of investors can make an offer to its shareholders at any time.
As such a takeover bid is the kind of news that has little to do with earnings but can quickly affect a share price. However, usually, shareholders of a company undergoing a takeover bid are happy with the instant boost this gives the share price. If the bidding company offers a substantial premium to the market price, shareholders may be convinced into selling their shares.
When another company gets involved, the takeover becomes a bidding war. This situation can bring an increase in share price worth several years of capital growth.
Furthermore, a company considering a takeover target is said to have corporate appeal.
When rumours of a takeover occur, speculators buy the company’s shares hoping to turn a quick profit when a bid is announced. Corporate appeal can add a significant premium to the share price, but it can also vanish quickly if the situation changes.
Some stock market investors operate on the principle that what affects a particular company will eventually affect other companies in a similar industry/sector.
They believe that if one company’s share price rises or falls because of specific news, its peers will be similarly affected. In other words, whatever happened to the first company will also happen to its competitors. This approach is an attempt to piggy-back on another share’s good news, but it’s pure speculation and very risky.
With everybody seeking that edge to get ahead of everybody else, rumours normally do flourish. The cliché of the share tip picked up at a dinner party or around a bar is real. In the current technology world, rumours are propagated far more quickly. The various internet chat forums and social media platforms are conduits for a vast linkage of information sharing. A lot of it is normally rumour and speculation. Investors need to be on their guard in sorting out rumour from hard and real information.
Under the disclosure requirements of the stock market, listed companies must inform the market as soon as practicable of any news likely to have a material effect on their share price, to ensure a fully informed market, this information should be disseminated to all investors at the same time to avoid any information gap that may be created and that may affect the company’s share price.
By the time you notice an undervalued share, speculators who are quicker off the mark are already on it. The saying is, “Buy on the rumour, sell on the fact’. You don’t have to be plugged into an internet chat forum, or a social media platform to pick up spicy rumour.
It can happen anywhere – at a bar, on the telephone etc. If the rumour is hot enough and you buy the shares and then sell them at a profit, technically you have broken the law. If the rumour hasn’t been divulged to the wider market, what you’ve just done is insider trading, which is legally prohibited.