LEGAL VIEWPOINT: Factors affecting price of shares

By Dr AbdelGadir Warsama, Legal Counsel

Asia 728x90

Every investor or dealer is aware that price of shares in stock markets are volatile. They are booming or decreasing every morning. As a matter of fact, an increase in the price of shares of certain companies could happen or could take place many times in one day, however, within certain legal parameters.

Price of shares, generally speaking are determined by many different factors. The main factor could be excellent performance of the company. Other factors include, success of certain projects owned by the company or under execution, election or appointment of new Board, appointment of new management, merger and acquisitions or creation of new assets. All such factors, inter alia, play important role in raising price or the nominal value of shares in a company.

On the other hand, there may be other negative factors that could seriously damage the good name or image of the company, and accordingly, this could lead to a sharp drop or decline in the price of the share. 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 shares could happen to any company without exception. This is the rule of the market.

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

Moreover, in certain instances, the factors could come from third parties outside the control of the management and or the board of directors of the company, such as intervention of the Government, other competent authorities, unforeseen competitors, hazards directly affecting the production of the company as turmoil or strikes. There could, also, be some external or global issues outside the control, etc.

If we go back to the history of Microsoft, a noticeable drop in the price of its shares occurred at a time when competitors and US Department of Justice with other government bodies raised anti-trust cases against Microsoft. At this time, the price dropped sharply and the company lost money. However, prices started to go up after a Court decision and the negotiations that took place to settle disputed issues. We have mentioned this important case because we believe that it gives a good example to all and to show the consequences of certain circumstances, particularly external circumstances that could directly affect the price of shares.

With reference to the fluctuations of the prices, and generally speaking, all investors are advised not to run or rush whenever there is an increase in the price of 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 reasons.

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

The competent authority monitoring the stock market should also take the necessary steps to curb fictitious pricing that could happen from time to time, because the market will be affected and lead to a dangerous situation or consequences. The law gives 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 necessary action when the price of shares is affected unnecessarily or insubstantially. The law provides for this important issue so as to protect investors and, at the same time, to create a healthy environment for investment in stock markets.

Needless to say, that price of shares for companies outside the securities markets are uncontrollable and totally depends on the offer and acceptance based on the agreement between the parties. As example, deals between new technology companies, Uber & Careem, wherein Uber have acquired Careem for 3.1 billion dollars. It appears, this is the rule of the market for new technology companies, however, away from regulated security markets.