News - What makes a share price move?
Less than one in ten people own shares directly, according to a new survey by the stockbrokers, The Share Centre.
In the 80s there was an attempt to start a shareholders democracy. A series of privatisations was meant to create a nation where people had some sort of meaningful ownership of our biggest companies.
But to a large extent that failed. Direct share ownership is still uncommon and even amongst those who did buy into the privatisations, ownership is wide but thin - meaning that lots of people might own the shares but they don’t own many - perhaps just a few BT or British Gas shares.
Although few people own shares directly, millions of us are dependent on how shares perform.
If you have a private pension, the likelihood is that it is invested in shares.
Even if you have a company pension it will be invested in shares and if the market doesn’t do well your pension won’t be worth much.
So the stock market affects a huge number of us.
The idea of a share is that you share in the fortunes of the company.
You share in the delights when things are going well and you share in the terrors when things have gone terribly.
And you do that sharing both through a change in the price of a share and the share of the profits that you get, through the dividend payment.
All of this sounds very sensible - but in reality share prices often move in a way which don’t seem sensible at all.
That’s because shares actually move for reasons unconnected with how the company is doing at the time.
Shares are based on performance and over the long term performance is a key issue.
But short term movements are much more dependant on expectations.
Investors and speculators take out their binoculars and look ahead to see what they think might happen in the future.
They bet on the share price based on those expectations rather than what is happening at the time of the investment.
As a result, things can often look odd.
An investor might buy shares in a company which has reported low profits because he expects business to improve.
And in this case, despite the fact that the business is poor, the share price rises.
It is rising on expectations or hope that things are going to get better.
Lets assume business does improve and another investor sees that and says ‘wow that’s something I want to invest in’.
And it seems a sensible decision because this is now a thriving business.
But again the market is not worried about what’s happening at this point - it is again looking forward and now the future is thought not to be good and so our hapless investor actually has bought at the top and sees the share price collapse.
So the share price falls despite the business doing well.
And that is partly why investing is so difficult. Expectations are very important.
Even if they are wrong, expectations can be the most important thing in determining share prices.
Student Guide
Millions of people around the world are affected by what happens on the Stock Exchange - even if they don’t hold any shares.
Lots of people have life insurance, belong to pension schemes or other forms of savings. All these financial services depend on what happens on the Stock Exchange because the money that we pay in is invested on the stock market in the hope that it will grow.
If share prices go up - the value of these savings goes up.
If the share price goes down - the value of these savings falls.
Just think…
Why do you think pension funds invest the money on the stock market?
Why do you think they employ experts to invest the money?
Why do you think people who want to invest money for savings or pensions are happy to pay people to do it for them?
What makes share prices change?
The price of a share in a business depends basically on two things -
- How well the business is doing
If a business is make a good profit or is growing and is likely to make a good profit in the future, people will want to buy the shares and the price will go up. If the business isn’t doing well and there are warnings about profits, the price will probably fall.
- How well the economy is doing
If the economy is growing happily, there’ll be more jobs and people will have more to spend so many businesses will be doing well and share prices rise.
If the economy is doing badly, unemployment will be rising and people will be feeling worse off, businesses will feel the pinch and share prices will fall.
Just think…
What makes share prices change?
How does this affect the value of savings and pension funds?
Who owns shares?
Many shares are held by insurance companies, pension schemes and companies that sell saving schemes - so they can have a big effect on prices.
If one decides to pull out of the shares in a particular company, the price can fall dramatically.
It is important that such organisations behave responsibly because they can affect the lives of millions of people.
Just think…
Why can share prices fall dramatically if a big shareholder pulls out?
Why should institutional shareholders behave responsibly?
Watch your step
Investing in shares is a risky business. Although the long term trend of share prices is up, they go up and down in the short run.
People who hold shares spread their risk by having a portfolio which includes shares from different business sectors. If one is going down, other may go up.
They also employ experts to make decisions for them.
There are many businesses which specialise in helping people to make decisions. Some give direct advice on shares that are likely to go up or down.
With others, you can pay money into a ‘fund’ which specialises in a specific geographical area or a specific type of business.
Just think…
If you hold shares, why is it important to hold a mixture?
Why can an expert help?
Originaly from