Share Market Toolbox
prices of listed companies tend to rise and fall
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Beware falling stocks and the impact of insider sellingThe final trigger that prompted the posting of this web page was a news story in the Australian Financial Review newspaper (4th February 2017) entitled: "‘Banner year’ for insider selling as directors dodge corporate disasters”. (The news article referred to six stocks: BAL, ACX, BXB, HSO, SRX, VOC. See more details below*.)
IntroductionThe share prices of listed companies tend to rise and fall at the whim of the market participants who push the share price up, and those who pull it down — the on-going tug of war between buyers and sellers which is a normal part of the auction process which is the share market.
Much of this is caused by the opinions of the market participants who have views about fair value for the shares. These opinions might be influenced by the opinions of analysts, brokers or commentators, or it might based on the investor’s own estimation of fair value based on a set of assumptions.
Clever protection of investing capitalNo matter what the reason for the swings in share price, the astute investor and trader who is keen to protect capital, and take profits where necessary, will closely watch the share price performance. They might deploy a Stop Loss approach as their exit strategy — “if the share price falls below this particular level, I will sell just in case it might fall further”. A tougher trader who is even keener to protect capital might watch a rising price trend, and exit a position on a sign of weakness in the trend.
In some cases when a share price is falling, or exhibiting odd behaviour on the chart (such as a rising price on falling volume), there might be a very good explanation. It can be a good idea to drill deeper to understand why it is happening (on a price chart).
Inside information?In many cases where someone inside a company is selling their shares because they know "something", or a substantial shareholder is selling down their holding for a good reason, the average investor won't have the same information at hand, but they can still be alerted to the selling by studying the share price performance.
The simple start of a downtrend in share price can be a good hint that something is not right. This can be followed up by searching the company filings for "Appendix 3Y - Change of Director's Interest Notice" documents, or "Form 605 - Notice of ceasing to be a substantial shareholder" documents.
News in the form of profit warnings can also confirm the potential gloom, and help to explain the falling share price. Of course, being able to interpret the stories in the price charts certainly helps. This is the field of technical analysis.
How to protect the capitalFor a detailed case study of some stocks, and some very clear clues that told us there could be trouble ahead, see the extra details below.
* - You can read a recent news article from the AFR “‘Banner year’ for insider selling as directors dodge corporate disasters” regarding several of our ASX200 listed companies. Or if you don't have access to the AFR articles, see a preview in Brainy's Aussie Business Barometer blog.
For more details, see the short cut links above to other information on technical analysis.
Share Market TerminologySee Brainy's eBook Articles, and the Master Index list for details.
Or, search the eBook Articles.
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And whatever you do,
beware of the sharks in the ocean! class="ht14"
Conclusion?In conclusion, it is very easy to be wise with 20-20 vision in hindsight. But really, if we keep an eye on our open positions, and utilise some basic technical analysis principles, it is possible to consider the possible outcomes on the price chart. After all, we are playing with the probabilities and managing the risk, utilising the stories in the price charts. And with a little research we can often understand more about the underlying reasons for some stock falls — the sellers with the inside knowledge.
One of the downfalls of investors holding onto stocks like these is the greediness of wanting more and more profit. And then some investors continue to hold on in the belief that it will come good one day. In the mean time, the reality is that they have lost some of their investing / trading capital.
More information that could be useful for you:
And whatever you do,
beware of the sharks in the ocean!
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are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.