Why do shares fluctuate without announcements?

I smiled when I read your post Ozi ..... Why; because it reminded me how little I knew when I lost a small fortune many years ago trading things I knew pretty much nothing about

You will get far more educated answers than I will give you, but in layman's terms .........

1) The share/stock market is an auction of buyers and sellers ... All with a myriad of reasons why they might buy or sell whatever stock they choose.

2) If you think an announcement is likely to come out about a given Stock, and that announcement is "likely" to be positive, would you wait till after the announcement comes out and the price is "likely" to be much higher, or would you buy in anticipation (at a hopefully lower price)?

3) The million dollar question however ...... Will the announcement be positive as you hope, or will it be not so


There is the dilemma of the trader/investor ........... Nobody really knows whether any announcement will be what they expect, and that is why the Price of a Share fluctuates prior to news, or lack of. The irony is that, even if the news is good, the share price may still decline ... sad but true

I have not actually answered your question but hopefully my lack of information might make you consider "alternatives" .... good luck .... and don't put the house on it (like I did!!

 

Shares on a day to day basis moved based on supply/demand/emotion/greed/fear. No one knows what is it that make Buy A buy at X and buyer B buy for Y, only the buyer know his reasons and spread over 100 or thousands of buyer/seller it has many reasons and again it can't be nailed down to a reason. I can buy today thinking I can sell higher tomorrow, the seller think the opposite, the guy who buy from me tomorrow could buy for yield and don't care if it go up the day after etc...etc...

Share market is like any market or shopping mall, do you know why everyone go to the mall every day buying different goods for different price? You can buy a kettle today for $10, then tomorrow it has a sale and some other person buying for $9 but these people don't buy if its $10 ....

Endless reasons, don't try to work out the reason why, work out how much you think the good worth and try buying cheaper than what it is worth..

But over a long period of time Share price will track along the company earnings and prospect....as it it more or less price the share correctly to some degree according to its earnings and its future prospects among other things like monopoly position, market share, management etc....

 

It could be anything like I said, the thing you need to know is stock market has many kind of risk attached
System risk, market risk etc... Stock market is what you make it to be..it can be a place you gamble, a place you try to get rich quick, a place you invest for your retirement, a place to fund research and development, a place you get suck in and lose Lose all your saving to a more experience player etc...

System risk - fraud, manipulation, bad management etc... That cause price to crash
Market risk - can be anything people feel happy willing to pay more, people feel depress want to sell them for cheap.

I think you need to learn more about the stock market then the reason how and why may become apparent in time.

You can learn a lot from here
http://www.investopedia.com

 

There could be leak of market sensitive information. Although this is illegal, it is hard to prove. The affect would have to be financially significant. That is people made much profit or averted a significant loss for an investigation to take place. Proof would have to be in the form of a recorded or witnessed exchange of 'sensitive' information. Chinese whispers, gossip, grapevine, suggestions and hints make it hard to prove the source and that is why people use these forms of communication, it conceals the source identity.

 

It sounds like you are looking for a fundamental understanding of who, how, where & when stocks are traded.

Try these...

https://www9.asx.com.au/smg/documents/original_lesson_5_st.pdf

http://en.wikipedia.org/wiki/Australian_Securities_Exchange

 

Screenshot of the buy and sell orders for CLV, from comsec...when someone buys or sells "at market" the price will generally move.
~

 

It is YOU!

 

Ozi, springhill has given two useful links above.

It's a computerised system. The price moves simply because of supply and demand. If more people want to buy a particular share at a particular time than sellers want to sell, then the sellers can demand a higher price and the buyers will pay it, thus obviously pushing up the price.

Individuals and institutions will all have their own reasons for wanting to buy or sell.

One of the factors which has driven up, e.g. bank shares is their good dividend and franking yield: as bank interest rates fell, more people sought a better return on their funds and moved from cash deposits into these bank shares where the grossed up yield was around 7 - 8% rather than the 4% available on cash.

 

Non-specific market events affect stock prices. Take for example, on a larger scale, the GFC. Stocks like Woolworths were relatively immune but their prices suffered due to the general de-rating of all stocks as investors threw the baby out with the bath water, so to speak. A lot of companies that had no specific issue saw share prices fall 20-30% simply due to a heightened risk premium in the market as opposed to anything specifically that they announced.

 

The price you see is the price that a seller (or sellers) just sold to a buyer (buyers) through a broker (like Commsec) on the ASX (or whatever stock market you're looking at).

A stock broker is like a real estate agent... they represent you, their client, and buy or sell as ordered.

Where they buy and sell is on a stock exchange, a market.. .in this case it's the ASX and so payments are settled through the ASX, with price quoted as the ASX system - this system sell data to the brokers, news network etc...

In short, the price is between buyer and seller.

And if you and I agreed, and through our broker, sell a CBA stock, and our trade is the last trade for the day, that's the price most often quoted.

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What is a stock/share on ASX?

ASX is a secondary exchange market where owner/investors can sell pretty much any amount of ownership/share in the company their broker allow them (min $500 per transaction i think). Most often, the company/business itself have nothing to do with the agreed price being transacted - it's purely between the buyer and seller on the market.

However, managment does want their firm's stock price to be highly valued [or correctly valued] since their bonus or the company's ability to raise capital depends on it. So they would issue more shares if they think the price is too high and they could get money cheaply, or buy back shares if they think it's good value... or could do these and others to manipulate or give an impression of the firm's true value...

But ultimately, what price a share could sell at depends on the value of the assets behind that share. i.e. the business itself.

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So on days where you see a stock drop or rise by x% and the news guy say the company just lost $100 million or gained billions... that's just news and just what that transaction (could be just two bloke or a few dozen) value the company at. That price might be representative of the market, it might just simply be two blokes - one of which is right and the other is very wrong and has nothing to do with the company actually losing or gaining any money.

It could be that company just reported they've lost 100 mill and the market price reflect that... often it's quite separate.

 

Each may have a variety of reasons and it is remotely possible that both are right ((or both are wrong))

 

Yes, true. A seller might reinvest that capital and do much better while the buyer could also see gains that outperform his previous holdings.

But if we're to only look at that one transaction by itself, if it goes down the seller wins... if it goes up the buyer win. That's what i mean.. i tend not to think of other variables, haha...

 

Even if there are no company specific announcements, there may be macro announcements that affect the company and these will impact on the actions of those active in the stock.

RoE, Julia and others have mentioned that shares generally converge to some concept of long term value. Long term value is an opinion and there will be a range around anyone's perception of it and perceptions will vary. It will also develop over time as things you assumed do not come to fruition (including positive surprise). Hence, there is no smooth convergence to be expected in absolute terms, it is convergence to a concept of long term value - which moves around. This does not detract in anyway from the wisdom of the statements.

This uncertainty creates its own dynamics. Because you are unsure, you watch what other people are doing because someone out there is smarter than you and there is some truth to the concept of Wisdom of Crowds. Funny thing is that, within reasonable bounds (or even unreasonable bounds on uncommon occasions) stock prices show herding behavior. So, one person in the herd of Wilderbeasts moves because he got itchy or that patch of grass was eaten or they had a dental bill to pay, then suddenly people take notice and jump on. This creates momentum effects, moving stock prices around the notion of valuation as perceived as people take in the information about movement and react. After a while, more and more people think it is ridiculous and valuation concerns attenuate the momentum effects. As Sytematic (not in this thread) has mentioned, the markets are driven by Value and Momentum (amongst other things - comment mine). If there was no uncertainty about valuation, this would not happen. You will find, as a result, that prices move way beyond anything that could be said is long term value....and there is your opportunity for profit.

The above is a medium term concept.

In the near and ultra short horizons, valuation matters less (as opposed to not at all) after you have decided what to trade and have a targeted volume in mind and it is about getting or providing liquidity. As others have mentioned, this is an auction process that runs continuously except for certain dynamics at the start and end of a trading session. All sorts of efforts are made to outfox each other. The more standard approach is just to leave an order at a price and then get on with your day. Today, it has moved on a lot. But, in small clues that can be discerned, it is possible to create little runs of prices or to sniff out where investors might be active. Technical trading and a hyped up version of this called algo trading or HFT are active here.

This all takes place on an exchange, like the ASX. Most exchanges are electronic in nature. Many years ago it was open outcry, where stock jobbers yelled at one another to agree a price and volume of a transaction and scribble chits and yell the price out to a chalkie (if you are an AFL fan, Carlton Captain Stephen Kernahan was a chalkie and loved to kick footballs around the trading floor when trade was thin...bloody funny) who would write in on a big - chalkboard. A client sends an order to a broker. This can be via phone, fax email or direct electronic link. These brokers are registered with the exchange and must meet all sorts of requirements. They then send the order to the Order Matching System of the ASX. That's just like the printout from So_Cynical. Any system with a feed to the ASX produces screens that look almost identical to that. Orders are prioritized by Time of receipt and then Price. There are other trading venues called dark or light pools, but let's not go there. The arrival of orders to this site is essentially anonymous. You have no real idea of what is motivating any particular trade. As an investor, you have no idea which broker sent it. One person might have 20 orders on the screen, or be hiding their volume so as to bait the market to them. Prices move around partly randomly (people call in to trade whenever it suits and there is no order to this), partly by reaction (people trade as prices or volume on screen moves and it motivates them to enter the market) and partly to 'spoof' (to fish out reactions from the market). You don't know who is doing what without some very special sauce. In all cases, orders are hitting the ASX and causing imbalances to occur, resulting in stock price movement.

Welcome to investing. I hope this helped with your question.

 

Agreed.

RY, I don't believe I have ever come close to intimating that 'shares generally converge to some concept of long term value'. I am not a 'value investor' and have no idea what 'long term value' would be. I am not clever enough to engage with esoteric calculations or company valuations and am a very simple trend follower which involves nothing more sophisticated than adding to my winners and letting them run, and quickly culling the losers.
I am also entirely happy for my pf (small as it is whilst I have the majority of my investable assets in cash) to be overweight those companies which are bringing me the most profit.

This philosophy would seem to be a pretty far distance from any concerns about 'long term value'.

I have no interest in becoming involved in this debate. Just wanted to clarify the above point.

 

Sorry for stretching. I have had two strikes with you. I hope the account refreshes at some point. But it comes from sincerely wanting to give you due credit. The near term multiples you are using for your judgments like grossed up yield vs cash (26th-April-2014, 11:29 AM in this thread and other posts you have made) turn out to be shorthand for longer term valuations - with all of their shortcomings. It was this I was trying to credit you with. You are, perhaps, better and more skilled than you imagined. I hope this is received in the spirit that is intended.

 

I am coming late to this discussion, but there are a couple of elephants in the room.

1. Analysis of changes in prices of shares shows high variability. Over a period of time the price will move from one level to another. Divide that change by the number of days it took to get a daily average. Similarly compute the standard deviation. The standard deviation of changes in financial prices is very high, relative to the average, for every financial data series.

2. By the fundamentals of value, the price of the shares of a company are the present value of the stream of future dividends, discounted to the present. This is often amended with the addition of prospects for earnings growth, but fundamentalists would say that is already factored into anticipation of future dividend growth.

3. Technical analysts believe that the markets are very nearly efficient. That all fundamental information is discounted by the market and the shares are properly priced at all time.

4. The price of shares of a company are inefficient to the extent that insiders -- people who sit in the corporate board room -- have information that the market has not yet discounted. How they distribute that information, and how they act for their own accounts, contributes to otherwise unexplained price changes.

5. Prices of assets in nearly efficient markets are governed by the same physical and mathematical relationships that govern large amount of small particles -- diffusion. A very large part of the price changes is due to randomness.

6. As mortals, standing outside the board room, we cannot tell which The cause is.

Best regards,
Howard

 

To value a stock based on its dividends payout will greatly undervalue the stock and will lead to either missing out on great businesses that pay no dividends, or getting into poor ones that pay a higher dividends.

I know people do, or are taught to, see dividends as real income to them because what the firm keep is the firms and what's in my bank is mine (and the taxman's)... but that's more harmful to an investor's future.

What one ought to do is to discount the earnings, not the dividends... and in discounting, use no growth model or growth stages... doing that will, if you were to get the absolute growth rate/s right, be of little use... but if you are too optimistic about the company's growth, could lead to over valuation....

chances are you and me and all the masters of the universe are kidding themselves to think we could predict any company's future growth with any accuracy... and a minor error extended to eternity will be serious trouble.

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and the market is not efficient. Just because it get things approximately right some of time doesn't make it right all of the time or generally right. And no one could know when the market get it right without hindsight... and often, even with hindsight, will wrongly attribute this or that causes.

e.g. say i bought XYZ and value it at $20 a share. I probably won't pay $20 a share, might wait til a bit lower or for whatever reason i decided to pay a little higher than that 'cause i'm too busy to wait around.. That's the price that determine the market 'value', not its true value.

Then say after a few months XYZ, which sold at $15 to me, went to $20... it might get to that because of some new contracts or favourable policies that i have no idea when i make the valuation... or it could get there from no new development but just because the market finally catch up with me...

and that's just one trade.... how could an entire market be efficient?