How does the share price fluctuate

Why do the stock markets fluctuate so much?

On hot trading days, individual stocks can easily rise or fall by 15% or more. Little changed in the company itself on this day - how can these strong fluctuations be explained?

Photo: panthermedia.net/WavebreakmediaMicro

A weighty reason for the strong fluctuations is that shareholders can claim an almost infinite right to company profits. In some companies, like Siemens, which are several hundred years old, shareholders have probably rightly done so.
Unfortunately, since nobody has a crystal ball on their desk, today's profits are often taken as a basis and carried forward into the future.

Future profits and a look into the crystal ball

Future profits are of course further away and are therefore discounted. Nevertheless, depending on the valuation model, profits for the next five years represent only around 35% of the share price that an investor is willing to pay today. In order for it to pay off for investors, the company must still run properly after five years.

The fatal thing on the stock market is now: If, due to short-term political tensions or a special economic situation, today's profit changes dramatically - up or down - the whole chain of future profits is usually adjusted by the stock analysts to the best estimate - namely today. So a small change in earnings today has a massive impact on stock valuation. If the profit increases by 10% today, the starting point in the valuation model often increases by 10% and consequently the share price can also increase by 10%. However, there are also factors that reinforce the outliers.

Buying shares on credit and the game of brokers

Quite a few investors invest in stocks on credit, i.e. with a credit exposure. However, especially on weak days, banks pull the plug and then often sell at prices below the fair value. Some institutional investors also only have limited risk budgets, which force them to act even more intensely in the event of declines.

And then there are the brokers who always quote prices and thus act as a counterpart to the investor in most transactions. The interesting thing is that the more the prices fluctuate, the more trading takes place. This increases the fee income for the broker. Since they set the prices, it is not presumptuous to claim that a little greed and panic is often created here - also from the research side - every day. Prudent investors know the difference between the value of a company, which changes only slightly every day, and the prices on the stock market, which bring about new exaggerations and understatements almost every day.

Michael Thaler is a board member of Top Vermögen in Starnberg.

A contribution by:

  • Michael Thaler

    Board member of Top Vermögen from Starnberg