Share Price Changes (AQA A-Level Business): Revision Notes
Share Price changes
Share prices move up and down constantly, and understanding why this happens is crucial for anyone studying business. When a company's shares become more valuable, it affects not just investors but the entire business. This note explores what makes share prices change and why it matters.
Understanding shareholders
Shareholders are the people or organisations that own a company by holding at least one share in it. When you buy a share, you're buying a small piece of that business. These owners can be individuals, other companies, or large institutions like pension funds.
The money that shareholders invest is called ordinary share capital. This is permanent funding for the company — the business doesn't have to pay it back. If shareholders want their money returned, they can't ask the company directly. Instead, they must sell their shares to someone else through the Stock Exchange, which works like a marketplace for buying and selling company ownership.
While individual people can invest in shares, they usually only own a tiny fraction of any one business. The biggest shareholders tend to be financial institutions such as pension funds and insurance companies, which invest huge amounts of money on behalf of their members.
What role do shareholders play?
Shareholders have important rights that give them a say in how the company is run. Major decisions that significantly impact the business must be approved by shareholders at a general meeting. The main role of shareholders is to attend these meetings, discuss whatever is on the agenda, and ensure the directors don't exceed their powers.
Shareholders can also take certain actions themselves, such as removing directors or changing the company's name. This gives them real power to influence the business direction.
Why people invest in shares
There are two main reasons why individuals and institutions choose to invest in shares rather than keeping their money elsewhere.
Income through dividends
When a company makes a profit, it can choose to share some of that money with its shareholders. This payment is called a dividend, which is a portion of the company's after-tax profit distributed according to how many shares each person holds.
The amount paid as a dividend is decided by the board of directors and can vary considerably. Investors hope that the dividend they receive will increase over time as the company becomes more profitable.
Capital growth
The second reason people invest is the hope that their shares will increase in value over time. If you buy a share for $5 and later it's worth $8, you've made a $3 gain (called capital growth). Investors look for companies they believe will grow and become more valuable in the future.
Common Mistake to Avoid:
Don't assume that when a shareholder sells shares, the money goes back to the company. Shares are sold through the Stock Exchange to other buyers who want to purchase them, similar to how you would sell a used car to another person rather than back to the car manufacturer.
What influences share prices?
Share prices are determined by market forces — specifically, supply and demand. When more people want to buy a particular share than sell it (high demand), the price rises. When there are more sellers than buyers, the price falls.
It's important to recognise that both dividends and share prices can go down as well as up. Several factors cause these fluctuations:
Company performance
If a company reports worse-than-expected profits, the share price typically falls. Conversely, if profits are higher than expected, share values increase.
Example: Retail Performance Impact
If a retailer has poor sales during the important Christmas period when sales are usually strong, investors will lose confidence and the share value will drop. This demonstrates how seasonal performance in key trading periods can significantly affect investor sentiment and share prices.
Expectations about future performance
Sometimes share prices change based on what investors think will happen in the future, even before a new product launches or financial results are announced. If the market believes profits will improve, the share price may rise in anticipation.
Changes in the market or competitive environment
Shifts in consumer behaviour or competitive pressure can significantly affect share prices. What's bad for some businesses can be good for others — when consumers moved away from traditional supermarkets like Tesco towards discount stores like Lidl and Aldi, Tesco's share value declined, but the discount retailers likely benefited.
The same principle applies to global events. Conflict in the Middle East might be harmful for some businesses but beneficial for arms manufacturers.
World uncertainty
Major global events create uncertainty, which makes investors nervous. Economic downturns or international conflicts can cause share prices to fluctuate as investors try to predict the impact on company profits. During uncertain times, investors may sell shares in companies they believe will be negatively affected.
Exam Tip: Economic Changes Don't Affect All Businesses Equally
An economic downturn might be bad for some companies but create opportunities for others. For example, during tough economic times, budget retailers like Tesco Value or Aldi often perform well, while luxury brands may struggle. Always consider both positive and negative impacts when analysing economic changes.
Market capitalisation
Market capitalisation provides a valuation of a company by multiplying the share price by the total number of shares issued:
This calculation shows the total market value of a company. Changes in the share price directly affect this valuation. A rising share price might signal an opportunity for investment or even a takeover, while a falling share price might indicate a business in decline.
How ownership affects business decisions
The type of ownership structure significantly influences how a business operates and what it prioritises.
Public limited companies and short-term thinking
Profit is a key objective for many private sector businesses, and for some, it dominates the decision-making process. Public limited companies are owned by shareholders who are often primarily driven by profit. This can lead to a short-term approach to business decisions.
When shareholders focus heavily on profit, decision-making tends to prioritise activities that will generate profit quickly. The company's mission statement and broader objectives may take a back seat to profit achievement.
Example: Tesco's Profit Pressure (2014)
This emphasis on profit has been demonstrated by major companies like Tesco. In 2014, Tesco experienced falling profits and made errors in reporting higher profits than they actually achieved. These failures resulted in a sharp fall in the share price and the resignation of the CEO.
This case illustrates how the pressure to meet shareholder profit expectations can lead to poor decision-making and serious consequences for the business.
Sole traders and private limited companies
By contrast, sole traders and private limited companies are less affected by the pressure to achieve immediate profits. These business forms can maintain a closer focus on their mission statement and longer-term objectives because they don't face the same level of scrutiny from external shareholders demanding quick returns.
This difference in ownership structure creates fundamentally different approaches to business strategy and decision-making.
Key Points to Remember:
- Shareholders own companies and have the right to vote on major decisions at general meetings, giving them real influence over business direction.
- People invest in shares for two reasons: to receive dividend income from company profits and to benefit from capital growth if share prices increase.
- Share prices fluctuate based on market supply and demand, influenced by company performance, future expectations, competitive changes, and global uncertainty.
- Market capitalisation (share price × number of shares) provides a company valuation and changes whenever the share price moves.
- Public limited companies often prioritise short-term profits to satisfy shareholders, while sole traders and private limited companies can focus more on their mission and long-term objectives.