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Hi John, I read in the answer of the aforementioned question that if a company sells off a large block of shares at once it’ll drive down it’s share price? Why is that?
Secondly it also was written in the answer, that the volatility of earnings can have an Impact on shareprice, can you also please briefly explain this aswell?
And thirdly I am confused as to what signalling effect does issuing new equity has? Is it good or bad, what will be effect on share price, I mean don’t the investors and markets will think that company might be in difficulties hence it’s raising finance?
cheers.
1 the stock market is like any ordinary market. If more people are buying than there are people selling, the the dealers put the prices up to persuade more people to sell. Similarly, if more are selling than buying, then the dealers mark the prices down to persuade more people to buy.
2 the price people pay for shares is partly determined by the dividends they expect. The more uncertain the earnings are, then the more uncertain the dividends are in the future, and so they will not be prepared to pay as much.
3 the signalling effect can be good or bad. If investors think it is because the company is desperate than it would indeed push the share price down. However they are more likely to think that the company is going to expand and do better – this would push the price up. (A company would not normally issue new shares because the were desperate because the issue would be likely to fail – who would buy new shares in a company that was likely to be going bankrupt?)
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