Who moves a share price and how can I benefit?
Paul Roberts, Stockomendation
Paul Roberts CEO and Founder of Stockomendation looks at the movers and shakers able to influence share prices
It’s Sunday morning and as you read about a stock that is tipped in the business section of the newspaper does this question cross your mind? ‘If the hundreds of thousands of people like me reading this section act on the tip in the morning when the market opens will it move the share price and if so, can I make a quick buck?’
So who moves share prices? Which journalists, individuals, institutions etc. move share prices and how can I build an investment strategy out of this?
A simplistic view is that share price movements are dependent on the size of the company, the liquidity and volumes of the stock, the type of money invested into that stock, the share structure, the influence or reach of the person recommending the stock and your own approach to investing (short term/long term value/income etc.) and the coverage the stock gets by research houses, tipsters, analysts and the media.
As an example, small caps are not covered so well by big research houses and analysts but more so by tipsters, magazines and newsletters.
Every Little Helps
Let’s consider two examples of share price movements – a large cap stock and a small cap stock on AIM.
If a national newspaper says buy Tesco it is unlikely to change its price significantly unless tens of thousands of readers buy quickly after the recommendation and do so heavily.
Why? The market capitalisation of Tesco is roughly £18 billion with the average number of shares traded daily around 23 million; at around £2.20 per share that means about £50 million of stock is traded on an average day.
Given that most small investors trade in bargain sizes of hundreds or thousands of pounds it would take an army of smaller investors to read the article, trade the stock heavily and simultaneously to move the share price and make a quick turn.
It is therefore unlikely that a single newspapers tip saying buy Tesco right now would have any significant impact on its share price; it may be comforting to know if you are invested that your stock is being tipped and maybe a few thousand readers would act on the advice and buy but overall the impact on its share price would be negligible.
Conversely, if Warren Buffett the world’s most famous equities investor or a major fund said ‘buy Tesco’ then it WILL move the share price.
Warren Buffett, and the big funds don’t deal in thousands of pounds of share purchases like the majority of us, they deal in tens of, and hundreds of millions of pounds worth of shares and Buffett deal in billions; given the amount of shares traded on any one day it could clearly have a massive impact on its share price, if Buffett said ‘buy Tesco’.
At one point Buffett’s investment company, Berkshire Hathaway, was Tesco’s third biggest investor with a more than 5% stake in the business.
‘It could clearly have a massive impact on its share price, if Buffet said ‘buy Tesco’
The market would anticipate him taking a stake and volumes and interest would spiral. A single £200 million share purchase in Tesco (ie approx. 1% stake) would have a single event impact that would take 200,000 + small investors investing £1000 each at the same time to have a similar impact. A big player with influence, reach and funds recommending Tesco sends a signal to other institutions which may trickle down to the rest of us.
Buffett has pedigree, so he can move share prices as an individual, but what about others who are less well known – do tipsters and financial journalists have the same impact?
Again this depends on the size of the company, liquidity and volume of its stock, the type of money invested, the share structure, the influence or reach of the tipster and your approach to investing.
AIM stocks typically have very small market capitalisations, poor liquidity, often do not have major institutional money invested into them, have lower volumes of shares traded relative to shares in issue, high risk investors interested in them, can have more restricted share structures and are not really well covered in research terms by market analysts.
As an example, on Saturday 18th of July 2015 in the Daily Mail, Joanna Hart tipped Optibiotix Health, a small UK based AIM stock as a ‘risky buy’.
The share price closed on Friday the 17th of July at 33.38p.
Optibiotix has a market capitalisation of £27 million, 73.6 million shares in issue with average daily shares traded of about 120,000; by way of comparison, on a single day’s trading only 75 trades were made in the company compared with 6857 in Tesco.
By market close on Monday 20th July, two days after the tip was published and the first trading day, the share price rose by 11.6% to 37.25p on sixteen times normal trading volumes with close to 2 million shares trading hands.
‘The first trading day after the tip was published the share price rose by 11.6% on sixteen times normal trading volumes’
Over a 10 days period three stock tips we made to buy the stock – Hot Stock Rockets said ‘buy’, Share Prophets said ‘buy’ and then the Daily Mail ranked it a ‘risky buy’.
Nearly 6 million shares traded against a more normal 1.2 million and the share price moved from 32.75p to about 36.88p which was a 12.6% increase in the share price.
So what does this tell us? Buffett can move Tesco and in this case it would seem logical to conclude that Joanna Hart’s tip had a very positive impact on Optibiotix Health.
If I went onto a website or bulletin board and said buy a stock then I would not move the share price, small cap or large cap but if a national publication or tipster recommends a small cap stock then I would argue that they can have a significant impact on the share prices depending on a few fundamentals of the stock they are tipping.
About 0.25% of Tesco shares trade on an average day and 0.2% of Optibiotix Health; however after the Daily Mail tip, nearly 3% of the share traded and the shares shot up. Small cap stocks are far more likely to move in relation to a stock tip than a large cap and large caps will move relative to noise from the big guns, so make sure you have good sources of information and track stock tips and news as best you can.
‘(Buffett’s) investment tanked, losing Berkshire Hathaway £287.6 million. It is almost impossible that such a smack in the chops didn’t elicit a modicum of schadenfreude from the little guys’
It is difficult with our busy lives but I track stock tips from well-known publications and sources and it helps me in my investment strategy.
I bought £5k of Optibiotix Health which is now worth £7k in a few months so I am happy with that; if the Daily Mail changes its advice to ‘sell’ then I’m out as fast as I can be, but I have to make sure I can see what tips are made.
That is why I launched Stockomendation, the UK’s only stock tip aggregation and comparison site, which tracks over 300 tipsters and journalists and has over 40,000 UK stock tips going back several years and other information listed on the site. I get an alert when a tip I am interested is made from our tracked sources and it works well as I simply haven’t got the time to look at the main publications in the UK all day long. I want the tip for the company I am interested in then I will look for the research and go to the sites that are making the specific tip.
Take a look at our site where you can see for yourself if stocks you are invested in have tips made about them, you can set alerts, you can see performance of tipsters and journalists or if you are simply looking for new ideas use the site to get to the sites of the most popular journalists and tipsters in the UK.
To allay any fears that the big boys have it all their own way and out-muscle markets to their own advantage, the ‘Sage of Omaha’, as billionaire investor Buffett is known, had a less than happy outcome to his investment in Tesco.
Despite four profit warnings, Buffett was too slow in getting to the checkout (he admitted to being embarrassed by his ‘thumb-sucking’) and his investment tanked, losing Berkshire Hathaway £287.6 million.
I think it is almost impossible that such a smack in the chops didn’t elicit a modicum of schadenfreude from the little guys although some of them could have been spared a stuffing had the Sage realised that the Tesco stock was past its sell by date.
Don’t get too misty-eyed on behalf of Berkshire Hathaway; that huge loss represented just one fifth of one percent of the value of the investment business which is valued at $212,000 a share!
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