LEGAL VIEWPOINT: Factors affecting company share price By AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

Every investor or dealer will be aware that prices of shares in the stock market, nowadays are mostly booming and increasing every morning, particularly in certain sectors. As a matter of fact, increase in the prices of shares of certain companies could happen or could take place many times in one day.

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The prices of shares, generally speaking are determined by many different factors. These factors could be the general performance of the company, success of certain projects exercised by the company or under execution, electing or appointing new board of directors, appointment of new management, merger and new acquisition policies or creation of new assets. All these factors, inter alia, play an important role in raising the price or nominal value of certain shares in a particular company or group of companies.

We normally see, the price of shares of certain banks operating in Gulf Countries increases due to the fact that those banks declare, and publish in the local newspapers, good profits for the year. The price of shares in certain other companies may increase due to the fact that there is good potential in the near future and every investor wants to take a slice of the cake.

On the other hand, there may be other negative factors that could seriously damage the good name or the image of the company, and accordingly, this could lead to a sharp drop or decline in the price of the share in the concerned company. Of course, no shareholder wants this to happen to the price of the shares in the company wherein he is investing his equity shareholding. However, generally speaking, there is no guarantee and the drop or decline in the price of the shares could happen to any company without exception.

These factors influencing drop in prices of shares could include failure of the company in certain major projects, or due to the occurrence of uncontrolled natural environmental circumstances such as a drop in tourism cause by spread of certain epidemics in certain places. Other factors could also include low profits, loss of new projects, conspicuous bad or corrupt management.

Moreover, in certain instances, the factors could come from other third parties outside the control of the management and or the board of directors of the company, such as intervention of  governments, other competent authorities, unforeseen competitors, natural hazards directly affecting the production of the company, like turmoil or strikes.

A good example we could cite is, Microsoft Co, which saw a noticeable drop in the price of its shares at a time when its competitors and the US Department of Justice with other government bodies raised anti-trust cases against Microsoft. At that time, the price dropped sharply and the company lost a lot of money over the incident. However, the prices started to go up after the Court decision in the case and, later on, the tough negotiations that took place between the concerned to settle the disputed issues.

It is important to mention that the decision of the Court in some of the cases against Microsoft is not yet final even though the Court decided that the company should be split into three entities. The decision, on the fact of it, indicates that the Court believes that the anti-trust case is founded and there is legal ground to accept it. However, the company is strongly resisting the allegations against it and they confirm that they have good legal defenses to support what they are doing…

Apart from the outcome of such cases, we strongly believe that Microsoft is doing great effort to promote and enhance the well-needed information technology and its related fields. We have mentioned this particular case because we believe that it gives a good example to all concerned to show the consequences of certain circumstances, particularly external circumstances that may directly affect the prices of the shares in certain companies.

With reference to the fluctuations of the prices, the volatile nature of the securities markets and generally speaking, all investors are strongly advised not to run or rush whenever there is an increase in the prices of a certain share because this increase could not necessarily reflect the real actual price of the share. Also, at the same time, investors should not panic when there is a drop in the price of a certain share because the drop could be occasional or for temporary sudden reasons.

In all cases, the actual reasons for the increase or the drop in the prices should be evaluated and studied very carefully before taking the decision to buy or sell. The necessary study will enable the potential investor to take the appropriate and wise decision. The investor could ponder many physiological reasons at the time of the decision, however, we call for some wisdom.

The competent authorities monitoring the stock market should also take the necessary steps to curb fictitious pricing that happen from time to time, because the market will be affected and lead to a dangerous situation or consequence. The law and regulations, give the management of the stock market the required legal authority to intervene whenever there is a sharp increase or decrease in the price of the share. The management is also authorized to take the necessary action when the price of the shares is affected unnecessarily or insubstantially. The law provides for this important issue so as to protect the investors and, at the same time, to create a healthy environment for investment in the stock market. No foul play is allowed and all players are to adhere to professionalism.