Interactive Investor

Don’t be shy, ask ii...why doesn’t this share price move much?

6th January 2022 08:52

Keith Bowman from interactive investor

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email yours to:

Mr Corbett asks: why are the prices of shares in some well-run and profitable companies producing goods for which there is a constant demand - I'm thinking here particularly about DS Smith for example - remaining so lacklustre for months on end? Logically, one would have thought DS Smith shares would be trading at a significant premium.

Keith Bowman (pictured above), equity analyst, interactive investor, says: leaving the specifics of DS Smith (LSE:SMDS) to one side, the question as to why share prices sometimes tread water, or remain lacklustre for months on end is a good one.

The value of any asset, including share prices, is determined by supply and demand. More buyers than sellers will push a share price higher. More sellers than buyers and it will fall.

There are many factors determining the balance of supply and demand for a particular share, or how much interest there is among investors to trade a stock.

Most obvious of these is news flow, or rather lack of it. Corporate events such as trading statements, or results for the quarter, half year or full year, often contain information that causes investors to reassess the value, potential value or expectations of the company. This triggers trading activity. Without a steady flow of information, there is little for investors to get excited about either way, particularly if a company is small, doesn’t have a large shareholder base, or simply operates in a more defensive, less exciting income-generating sector such as utilities or paper and packaging. 

Inactive periods like this can be reinforced during seasonally quiet periods for stock markets more generally, with far fewer market-moving events. Trading volumes often dip over the summer and Christmas periods as key decision-makers take a holiday. 

Companies are also less likely to report results at holiday time, giving investors no new information to assess prospects and therefore the share price. Valuation and the market’s assessment of it is key here. If most investors take the view that a share is fairly priced, given all the information available, there is less incentive to buy or sell a stock aggressively.

During quiet periods, the absence of big institutional investors such as fund managers can make trading more volatile. However, so-called liquidity – the quantity of shares available that makes it easy to match buyers and sellers – can be enough to maintain the status quo, especially among the larger companies.

Market trends or fashions can also cause a share price to go flat. This could refer to previously popular sectors that investors lose interest in, or even investment styles such as growth or value that move in and out of favour. After an initial negative reaction to a loss of popularity, fundamentally solid businesses often continue to do what they’re good at, just without the fireworks there were before.

While these reasons help explain why share prices sometimes might not move much, there is a good indicator of volatility that tells us how an individual stock typically moves compared with the wider stock market. It’s called beta. A reading of more than 1 indicates that a share has historically moved more than the stock market. A reading below 1 indicates that it is less volatile than the stock market.

As an example, the beta for Unilever (LSE:ULVR), RELX (LSE:REL), Diageo (LSE:DGE), United Utilities (LSE:UU.) and Severn Trent (LSE:SVT) is less than 1. All these companies operate in less exciting, more defensive and predictable industries.  

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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