Why does a share price go up and down

Happy Easter! I love my neighbors especially on Easter as they send the children many boxes of chocolates. I’m a very good mother of course, so I don’t let them have very much. More chocolate for me that way.

Here is a picture of my South London neighborhood. It’s a long “leafy” street that curves for half a mile. On one corner, Pissarro the Impressionist painter commemorated the scene in a famous painting. On another corner, the friendly neighborhood drug dealers ply their trade. This is South London after all.

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We’re very obsessed with house prices around here. Say you and I stood on this spot in the photo for a year and spied on house prices. We’d use the handy Zoopla app which tracks UK house prices. The US equivalent might be Trulia or Zillow.

A 4 bedroom comes up for sale for £4 million. Our own 3 bedroom might now be worth £3 million, three times what we thought. We get very excited forgetting that the larger house was much better finished and with a pool and gardens.

The next month a developer buys a huge property for £1 million and tears it down to do a refurb. We are thrilled, the neighborhood is going up. The developer runs out of money and is forced to sell his hole in the ground to another developer for a bargain basement price of £250,000. We are so depressed. The second, competent developer, turns the empty plot into six very flash flats with a wine fridge and everything! Each one quickly sells for a half million, so the plot is now worth £3 million according to our app. We are elated.

A widow dies and her estate “sells” her house to her children at a discounted price. Ridiculous, that just damaged our neighborhood average. Despair.

So over the year, watching just the website prices, we go up and down emotionally, as the house prices go up and down.

Over ten years though, this being an emerging neighborhood, if we took just a yearly reading, we’d slowly see house prices rising to meet general London demand.

Let’s say we compressed this entire year of following prices and moods and listed it on the market as “Mallika’s Hood Incorporated”. We further compress the data points into one day. The choppiness would look very much like the share price of your average company over a single trading day.

Over the long term, a year or more, the true value is captured in the price.

“In the short run, a market is a voting machine but in the long run, it is a weighing machine.” -Benjamin Graham

In the short to medium term, a share price moves according to overall market movement such an index moving or speculation. Unfortunate events and announcements about the company or the general economy can send the share price tumbling. Unexpected good news can send it soaring.

Over the long term - a year or more - the strategic direction set by the management team, the earnings of the company, as well successful or unsuccessful forays into new markets and products will set the price.

Now back to the chocolate.

Thanks,

Mallika