Commerical Many factors influence the price of a share

Press, 19 September 1977, Page 24

Commerical Many factors influence the price of a share

By

ADRIAN BROKKING,

commercial editor

Our previous discussions about the price mechanism of the sharemarket and the nature of investment have dealt so far almost solely with share evaluation — pricing an anticipated stream of future income. However, if that were all there was to the sharemarket. it would be easy, and we could all be millionaires quite soon.

There are many more factors determining the price of a share, and the pricing mechanism is quite complex. The following factors have to be taken into account: • The individual investor’s valuation of a given share; • The sharemarket’s valuation of the same share, as evidenced by the price; • Short-run supply and demand for the share;

• Long-run supply of the share;

• Long-run expectations, about the company, the particular industry, and the state of the economy generally; • The general level of the rate of interest; • Subjective factors influencing the market in the medium term — that is, “the temper of the crowd.” Although the actual objective pricing mechanism for shares is not much different from that for any other commodity, a share is subject to a number of other

influences. The reason is that a share, although a commodity itself, also reflects the behaviour and expected behaviour of other commodities ’at one or sometimes two removes. This is summed up by the Old saw that the sharemarket is a barometer of the economy. For an ordinary commodity such as wool, price is determined in the short run only by supply and demand. and .in the long run by the cost of production. In the short run, and if the market is to be cleared, buyers may have to pay more for wool than they might think it worth, if they really must have it to fill their orders. Similarly, sellers under those conditions may have to accept less than they might think their wool is worth.

The qualification about free market conditions is essential. If the Wool Marketing Corporation buys, in order to maintain a minimum price, the wool goes into a stockpile and the market is not cleared. In the short run, the

supply of wool (except for stockpiling) cannot be altered, and a farmer may have to take the price even if this is below the cost of production; but if the price of wool remains low for a I considerable time, farmers might give up producing wool and switch to something else. In the long run,- therefore, value tends to equate with cost of production. The long term price of a commodity might be compared with the evaluation of a share. However, the sharemarket is one of the most perfect of markets (that is to say it must be cleared every day, and no single buyer or seller has much influence over price) and the supply of a share is hardly ever reduced, and never as a direct response to the price. Price-earnings ratios, and discounting to present values — including adjustment for issues — have been discussed in previous articles. Ail the other aspects of the share price-mechanism will be dealt with in future issues.