LEGAL VIEWPOINT – Volatile prices of shares – Dr. AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr. AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

There are many factors that affect prices of shares of companies in stock markets on daily basis. Internal or international political factors, economical and social reasons could directly increase or decrease prices of shares.

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On the other hand during certain times of the year, every potential investor or dealer could easily notice that the prices of shares in the market are booming and increasing every morning. As a matter of fact the increase of the price of certain shares in certain companies could happen or could take place many times in one day.

General factors affecting prices of shares could be the excellent or bad 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 acquisition new policies, creation of new assets…etc…

All above 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.

The price of shares in certain banks, for example, could increase in certain days due to the fact that the banks declared and published in the newspapers, good profits in the first half of the year. The price of shares in other certain companies have increased due to the fact that there seems to be good potential in the near future and every investor wants to take part of the cake.

On the other hand, there may be other negative factors that could seriously damage the good name, goodwill and 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 in a company wants this to happen for the price of 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 shares could happen to any company without any exception in this respect.

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

Moreover, in certain instances, factors affecting prices of shares could come from third parties outside the control of the management 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, turmoil or strikes…etc…

A good example, we could refer to Microsoft Company, wherein there was a noticeable drop in the price of the share in this big company at specific time when the competitors, the Dept. of Justice and other government bodies raised antitrust cases against Microsoft Company.

During this critical time the price of shares dropped sharply and the company lost money due to this. However, prices started to go up immediately after the decision of the Court in the case and the negotiations between the concerned to settle the disputed issues.

We have mentioned this important leading case because we believe that it gives a very good example to all concerned to show the consequences of certain circumstances, particularly external circumstances, that could directly affect prices of shares in certain companies.

With reference to fluctuations of prices and volatility of shares, generally speaking, all investors are advised not to panic and run or rush whenever there is an increase in the price of a certain share because this increase could happen to certain instances that may not necessarily reflect the real actual market price of the share.

Also, at the same time, investors should not feel bad and panic when there is a drop in the price of certain share because this drop could be occasional or for temporary reasons.

In all cases the actual reasons for the increase or the drop in prices of shares should be evaluated and studied very carefully before taking the decision to buy or sell the concerned shares. The necessary careful study and evaluation of all relevant circumstances will, no doubt, enable the potential investor to take the most appropriate and more wise decision.

 

Investors could be under many physiological reasons at the time of the decision regarding the sale or non-sale of the shares, however, we call for some professionalism coupled with wisdom. Real wisdom is needed, from all, at such times and instances. The competent authority monitoring the stock market should also take the necessary steps to curb fictitious prices and unauthorized practices, that could happen from time to time, because the market will be greatly affected and dangerous situations or unaccepted consequences could happen including crash or total collapse of the system.

The securities markets laws give the management of the executive management of the  market the required legal authority to intervene whenever there is sharp increase or decrease in the price of shares. The management is also authorized to take the necessary action when the price of the shares is affected unnecessarily or unsubstantially . It is strongly recommended that there should be proper plans of action to be implemented as and when there is a need or emergency.

The law provides for this important issue so as to protect investors and, at the same time, to create healthy environment for investment in stock markets.