Stock Price Fluctuations- the not so 'obvious'
Stock Price Fluctuations represent modifications in the price of a stock. As with any other price, stock prices are at the intersection of demand and supply. However, there are certain factors that can modify the price of a stock, such as the earning reports of the company, different trends, the strength of the market, the economic growth, etc. Those factors are somehow ‘obvious’. What is not always so ‘obvious’ is how the company itself can manipulate supply and demand, and implicitly the price of its stock. We will explore some of these techniques in this post.
1 Splitting the stock: when a company divides the total number of its shares into multiple new shares. While the total value of the shares remains the same, the number of shares increases, therefore their price will decrease. This can be done for example to increase liquidity.
2 Reverse stock split: represents the opposite of stock splitting. The total number of shares is divided by a certain number, resulting in fewer shares with a higher price. This might be performed for example when the company wants to prevent the removal from an exchange. Exchanges usually specify a minimum bid price for a stock as a condition for the stock to be listed. If the price falls below that threshold for a certain time, then it can be delisted.
3 Institutional buyer (eg: a pension fund, a mutual fund): can sell or buy shares of a certain company in large volume that disturbs the market, affecting the price of the share
4 Stock buyback: happens when a company repurchases its own shares back from the public or private investors. This represents sometimes an artificial fix for the financial statement. The company’s annual earnings are divided by a lower number of outstanding shares, automatically increasing the earnings per share (EPS) without an actual increase in earnings. A company with annual earnings of $1 million with 1000 outstanding shares has an EPS of 1000$. When the company repurchases 100 of those shares, reducing the total number of outstanding shares to 900, its EPS increases to 1111.11$ without an actual increase in earnings.