You will have seen the warning: the value of your investments may go down as well as up.
It won’t always be possible to bail out before your positions turn south but at least when investing in stocks and shares there are portents that should set alarm bells ringing. Here are a few:
1. Company announcements
Share prices respond to news, bad, good and anything between. Including a 24-hour global rumour mill (which we’ll come to).
We’re dealing with a sophisticated asset class and some very savvy players. Poor earnings may be priced in (stock market investors always look ahead).
A batch of rough-looking numbers may be better than the market expects. Grim sales can sometimes mean a share price leap. The same for staff lay-offs or cost trimming.
Positive news can cause shares to sell if the noises are limited and underwhelming. It’s a topsy-turvy financial world out there. Be smart and do your homework.
“You know like gossip found me,” sang hip hop singer Lil Wayne. Gossip finds everyone.
Twitter, Facebook, an internet bulletin board or down the garden centre. Betrayal is instant. Larger companies may have the ballast and reputation to resist smaller word-of-mouth pokes and bitching. Smaller companies generally don’t.
Then there’s the media, new and old. Tightened budgets mean journalists don’t spend as much time fact-checking. Opinion dominates. There’s Fake News.
Companies can fight back using similar online tools. Viral marketing campaigns, for example. But the ‘news’ food chain is complex with little ‘right of reply’. So discriminate. There’s a lot of noise out there you don’t need.
3. Industry ‘events’
Many stocks in the same industry dip or rise simultaneously. That’s because the same market conditions apply to all. Mostly.
An oil price slip, say, is equally good news for Ryanair, KLM-Air France and IAG, reducing their fuel bills. A spike in the value of oil affects the same players. If investors think easyJet’s fuel price hedging strategy is smarter or more adept than Ryanair’s, it will suffer less.
But ‘events’ can provoke irrational responses, right across an industry or region. A terrorist outrage on a North European capital might deter US tourists from visiting Europe.
Athens may be 2,000 miles from, say, London, but for a Midwesterner the Greek capital is in the EU. And it’s a scary place.
4. The economy
How is business and consumer confidence? What‘s the cost of debt? How soon might it rise or fall? What is the latest Purchasing Managers’ Index saying? Many of these factors are inter-related.
Higher shop prices are often followed (though not every time) by higher interest rates. If the economy is looking healthier, stock prices may climb. But it’s often highly sector- or industry-specific.
When an economy weakens, prices in companies that sell basic staples such as detergent and loo-roll can rise (also utilities and IT). Rich or poor, you always need them.
Such stocks are called ‘defensive’ stocks as opposed to ‘growth’; they often have a chunky dividend attached. So, think sector, think economic cycle.
5. Exchange rates
They wreak havoc, or flatter, in equal measure – even if they don’t move stock prices per se.
Say you’re a UK investor with holdings in a German engineering company. We’ll call it ABC Hamburg. Over a period of time ABC Hamburg’s value stays flat. But the value of the euro slips 5% against the pound. Sell your ABC Hamburg holdings and you’ll be 5% down. The value of the trade reflects the value of any currency change. And vice-versa.
Overseas stocks are, then, a two-way deal: you’re investing in the stock and its home currency. You can reduce such headwinds by ‘pound average investing’ – drip-feeding money regularly over time that smooths out the currency gusts.
6. Supply chain wobbles
“Dear Buyer. The price of your [insert commodity name] has increased. That means we must increase the price by £5 per piece. Sorry for this. Kind regards. Supplier.”
Raw material shortages have a huge impact. Natural disasters (particularly when linked to food crops) do too. Inventory bottlenecks… Even civil war. It can be a long continuum.
Companies can do their best to substitute materials. Price agreements can also hold things together. But supply chain risk can be sizeable if there isn’t a strategy to fall back on. Passing the volatility – price rises – onto the consumer carries competitive and margin risk.
The underlying share price often responds.
7. Personality cults
Humans are sadly immortal. A brand’s lifespan and the lifespan of its boss are not the same.
Long term, a high-profile CEO can increase share price volatility. Worries about succession planning hang about. For some investors, rock-star/messiah CEOs can also signal deeper governance worry.
The challenge for a company is to align the boss with the brand image. A tricky alchemy to pull off when you’re talking the wheel of life – but it matters very much to a shareholder. Yet charisma can, at certain points, light a fire under a share price.
So you take your chances (and possibly profits) and hope your timing’s on the money.