Everyday we see price of stocks going up and down. When there is good news or high profit reports, the price of the company goes up. But if there is ill news or massive loss, the price goes down. Looking at the pattern, is the share price determined by company performance?
A very important point that you need to understand here is that the share price is not 'directly' determined by the company's earnings and performance... It is directly determined 'directly' by the balance between the demand and supply.
What do I mean? I'm quite sure you would have noticed that news and earnings would affect the company's price.... When there is good news or when the company reports a good annual profit, the price would go up. But if there is ill news or negative earnings, the price will go down... Then, why do I say performance do not directly affect the price? Haha... Noticed that I use the word directly?
The share market price works something like inflation, when demand overwhelmes the supply, the price goes up... And the same goes opposite... More buyers than sellers, then the buyers will offer a higher price in order to get the product (shares). So the price goes up... So that is why I say, the demand is the factor that 'directly' affects the price..
However, company performance do affect demand. When a company do well, there will more demand for their shares, and the price will go up... So, indirectly they do have some effects... Hehe...
So, it is important that you don't freak and go into panic buying or selling when there are news about the company.. The news will only have effect on the price when it is significant enough to cause a change in demand.....
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Do you know how the the vale of the share in the stock market may broke a company?
As an example let us say a company have: Market value of US$ 10,000,000 and 1,000,000 shares wich means US$ 10/share.
Supposedly the share of this company, due the weakeness of the market, start being negotiated at US$ 8,00 /Share.
In this example the company lost US$ 2,000,000 of its market value.
Can this loss broke this company?
If so, how?
Thank you.
Hi,
Actually, when the company has its IPO, it means that the company had sold part of the company's share to the public.... so theorically, after that is done, the share is like a product circulating in the market... and the price or value for the share will fluctuates... since that part of the company has been sold off, theorically, whatever that happens to it has nothing to do with the company...
However, in real life... most company will be holding a certain ammount of debt and most of the time is from the bank... during such borrowing, the bank normally will require some collaterals and the company's value is normally used... in such case, if the value of the share drop, the collateral will also drop. so in such condition, the bank may require some increament or payback if possible, so if the company's cash flow is not able to sustain, the bank may have to issue bankrupcy... however, this case only happens in very extreme cases.... extreme, but possible... and this case is applicable for any form of debt the company holds from any party, not just from the bank...
Regards...
Thank you very much for your comment. Now it is more clear to me how the value of share may intefere in a companies financial healthy.
PR
Hi, Iam currently researching on the same topic "the effect of company performance on share price" for my Thesis. I have been having problems with finding academin literature and scholars who could had have written on the same or similar topic. Any help?
Ranos
Hi Ranos,
I have the same problem for the same thesis subject...So if you can help me...
ps: I can give you some RTS...lol
pedrostami@yahoo.fr
Ranos,
I am facing similar problem too. I did find few literature review, I can share with you. Do you have any academic literature review than please contact
temursalin@gmail.com
Hellooooo Boss
I am writing a dissertation on the following topic:
'Does Equity Market Accurately Predict the Earning Performance of a Company in UK?'
So please give me some guide line........thanks
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