Share-rise mystery puts law of demand in focus
THERE was little change in the indices this month.
Within the local list, eg Solutions saw a significant increase in its share price, though there was no obvious catalyst behind this move with no fresh news or announcement from the company before the rise.
The large majority of the shares in issue are owned by the founding director and a few institutional holders, which means there are often few shares traded and that a small number of shares purchased or sold can move the share price significantly.
In this case, under a couple of hundred thousand pounds' worth of shares changed hands in November.
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But this was enough to lift the share price by 43 per cent and add nearly £4 million to the current market value of eg Solutions. It may seem strange that a small number, or amount of value, of shares traded can add such an amount to the market value of the company, but like pretty much everything else, share prices and markets are subject to the laws of supply and demand.
Of course, this is a short-term movement and what will really determine the true value of eg Solutions, or any other business, in the long run is the profitability and assets of the company.
Ben Graham, often called the founding father of security analysis, likened the market in the short term to a voting machine and in the long term a weighing machine.
By this he meant investors vote on their opinion of a company every day by buying or selling its shares and this will affect the short-term share price.
More buyers and the price moves up, more sellers then the price falls. However, in the long term the market will act as a weighing machine, eventually establishing the true value of the company.
Graham, like the world's greatest investor Warren Buffett, had the ability to put some complex ideas into common language.
I particularly like his description of the stock market as an irrational manic depressive called Mr Market.
Every day Mr Market comes into the office. Sometimes he is feeling very hyper and cheerful and optimistic as everything in the world seems fine, and he offers to sell his company to you at a very high price because he is so full of confidence about the future.
At other times, however, when the world is full of seemingly unending problems and difficulties, he is very depressed and offers to sell you his company at a very low price.
No matter how he is feeling, every day Mr Market is obliged to offer you a price, just like stock markets, but an investor is free either to take advantage of his price to buy his company or else just to ignore him. The point is, you should not place too much attachment to short-term movements of stock markets, where sentiment often rules, regarding the true worth of your equity investments. Stock markets are for long-term investment as this is where the true value will be realised.