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Go to Business, Finance, Risk, Information Management

The Public’s Influence on Stock Markets: Part 2

6th November 2017 | Michelle Hardy, Ian Pagdin

The role of the company

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Why is the company concerned? Well going back to reef analogy, financiers and investors circle the companies (the corals) looking for investments which will bring them a financial gain from an increasing share price (capital gain) and/or dividends (income). No shareholder wants to invest in a company which will return a loss.

As well as leading to falling share prices, there will also be an effect on the company’s ability to raise more finance BY either equity (from existing shareholders) or debt as providers are likely to be concerned that falling share prices are a sign of deep-rooted problems which may result in insufficient cashflows being available to repay loans or provide income and capital gains. In fact, to be successful a company must show the market that it can produce ever higher future cashflows. This is because the value of shares is calculated by individual investors based on the value of future cashflows, which are then discounted to today's value based on the investors perception of risk in the investment. Once calculated, this gives the investor a maximum value they place on the share. If they can then buy the share below that figure or sell above that figure they will consider the transaction a success.

What investors are willing to pay for a share affects the supply and demand for the shares which in turn influences prices in the real world. Effectively, when we talk about influence we are talking about the ability to affect share prices and, in turn, the ability of the firm to continue to trade in the long term by attracting enough funding and producing positive cashflows.

In respect of the public or individual when you start to break down the use of the word, things become more interesting. Who or what is the 'public'? Dictionary definitions of the public talk about 'concerning the people as a whole', so can people or communities 'as a whole' affect stock markets? Bearing in mind the sheer numbers of individuals in the world shouldn't this be possible?

However, one of the fundamental problems we have alluded to is that individual members of the public are by their very nature individuals, and one individual pitting themselves against a large company appears very unlikely to succeed in influencing anything. However, this idea of David the individual shareholder battling the Company Goliath has become increasingly outdated due to several developments over the last three decades.

Increasing connectivity through communications technology

There has been an exponential rise in the level of communication and social media comment in the 21st century. Individual investors in Perth and Penzance can speak virtually in real time (Perth, Australia not Scotland) as we are working in a global context. So, if that level of communication and common interest is focused and structured around an aim or idea, what might it be possible to achieve?

To read part 3 of this blog, click here. To get these updates straight to your inbox, sign up to our newsletters here.

About the authors: Michelle Hardy is a senior lecturer and module leader for several key modules on a variety of finance and international finance courses at Sheffield Hallam University. Her background is corporate banking and international wealth management for 14 years. She is a fellow of the Institute of Chartered Accountants in England and Wales.

Ian Pagdin is Course Leader for Banking & Finance Masters and a variety of finance and international finance courses at Sheffield Hallam University. His background is finance, having worked in the finance industry for 22 years, including 19 years as an independent financial adviser.

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