Guest Post: Why Does a Stock Go Up in Value?

Good evening, everyone!  Tonight I’m turning the blog over to Chris Pascale, who has written several informative articles for Wealthy Joe.  Regular readers may remember Chris’ first post here, “Is 15 Too Young?” , about the Roth IRA he set up for his teenage daughter.

Tonight, Chris is going to explain why a stock goes up in value.

Why Does a Stock Go Up in Value?
By: Christopher Pascale

How the hell does a stock’s price even work? So many people own stock, and many have little idea. In this article, we’ll discuss the short and long-term events that lead to share price fluctuations.

In the very shortest terms, the price is changed by supply and demand. In the very longest terms, it is changed by real, actual asset value, which leads to a more solid kind of demand. I’ll provide examples. Please feel free to add your own in the comments, and correct me if you disagree.

Supply and Demand for a Stock

Along with wanting to know how a stock’s price even works, some people wonder (knowing about supply and demand, in theory) if they could actually change the price of a stock. The answer is, with enough money, yes. I actually did this on Christmas Eve with my purchase of Growlife, Inc. (PHOT). The price was falling to $0.0072, at which point I decided to make my purchase, which I noted in this Wealthy Joe Article, of 3.4MM shares. I set my price for $0.008, meaning that that was the top price I would pay. The result was the following trades (the top ones being the most recent of the batch):

Date Time Shares Purchase Share Price
12/24/2018 11:59:57 1,974,669 0.008
12/24/2018 11:59:57       10,000 0.0079
12/24/2018 11:59:57     277,500 0.0078
12/24/2018 11:59:57     342,798 0.0077
12/24/2018 11:59:57     430,000 0.0075
12/24/2018 11:59:57       50,000 0.0074
12/24/2018 11:59:57     315,033 0.0073

What you’re seeing is that in that moment, I personally demanded so much of the supply available for sake that the price spiked up about 10%. It’s even possible that someone actually flipped their stock for a healthy profit in just a minute’s time, by buying at 11:59, and setting a sales trigger for the price of $0.008.

However, this was literally a 1-minute spike, and the stock has pretty much stayed in the range I bought it since. My purchase did not cause the price to run up to where I could make a 10%+ profit a minute after buying, because outside of my personal purchase, there wasn’t additional demand.

For some other real examples, let’s visit Tesla in 2013 and 2018, Lumber Liquidators and Volkswagen in 2015, Kroger in 2017, and RiteAid in 2018.

Tesla, 2013

On May 15, 2013, I was in the locker room at the YMCA after a workout. CNBC was playing and there was an announcement that Tesla had just posted its first profitable quarter. I went home, fired up my Ameritrade account, and purchased 5 shares (what I could afford to lose) at $83.50. In October, I sold those shares for $183.31, more than doubling my money, but, as you’ll repeatedly read in The Stock Market Is for Everyone, that price has about doubled since then, so buying more where I sold would have been a much more lucrative transaction.

Plain and simple, the short-term price went up because people wanted it more than they wanted to sell it. Long-term, the price continued to rise because Tesla earned further demand by being worthy of it.

Tesla, 2018

For about half-a-second, the world went mad. Elon Musk was on the Joe Rogan podcast, and he smoked a cigarette that had a combination of tobacco and marijuana. He also said that he had smoked before, but not very often.

As a result, the stock for the company took a huge dive. Now, forget your feelings about marijuana, and just think of the fact that Musk also drank whiskey on the podcast, which, despite taking so many more lives every year, did not seem to bother anyone. Musk did not get baked beyond his control. He didn’t say anything unusual (for Musk, that is). All he did was smoke a legal plant. I’d personally be more concerned if he vaped, and not just because people who vape look so dumb, but because no one knows what they are putting into their body when they do.

The stock went down 9% to $263.24. The share price then rebounded after the weekend by more than it fell and is up even more since. To be clear, it fell because people were selling at a greater rate than others were willing to buy at the market price. Essentially, people were willing to buy that Friday, but only for a lower rate. Come Monday, the actual assets (including a lot of cash) and sales of the company led others to buy more stock, and the price rose, even at prices higher than the shares had been on Friday.

Lumber Liquidators, 2015

In early 2015, Lumber Liquidators was revealed to have been selling toxic products. As such, the stock fell by more than half from February to March, and then fell more so as the year ended. Through 2016, the price stayed fairly flat, and then in 2017 the price went up to the point that you could have doubled your money.

Currently, shares are at a 10-year low.

What happened in 2015 is that institutional investors (big banks) could not hold this stock because they have shareholders to answer to, so even if it meant losing money, they had to sell with the crowd. The problem was that nearly no one wanted to buy the quantities that were selling, so the supply of available shares so outweighed the demand at current prices, that sellers had to accept lower and lower bids.

The stock kept falling, as it should have, because the company was going to have terrible revenue numbers when the returns of all the lumber started coming back. Adding to this poor sentiment on Wall Street, there were very bad feelings on Main Street. Imagine if you built a Habitat 4 Humanity home, and were handling donated wood from this company? You’d feel sick over what might happen to you and anyone you touched, and you’d feel horrible for the family you wanted to help.

In 2017, people forgot about what happened, and others simply understood that the stock was due to come back since the business survived. Demand, based on quarterly earnings, led to purchases of the stock in such quantities that the price rose. However, the company that sells you toxic wood for your home is likely rotten to the core, and so it does not surprise me that their stock price is as low as it is.

Volkswagen, 2015

As we were forgetting about the Lumber Liquidators debacle, Volkswagen had one of its own. They lied about emissions ratings. The stock fell by more than half because shareholders began dumping their holdings – some anticipating a better price coming, and others out of pure disgust.

Also, diesel vehicles were being returned and some drivers proclaimed that they would never buy another VW again.

The stock hit a low of $115.50 on October 2, 2015, and has not gone that low since.

As shares were dumped, the price fell. However, as the company owned its mistakes and readily took vehicles back, sentiment for the business went from bad to neutral to favorable. And unlike a house made with wood from Lumber Liquidators, I’d feel comfortable putting my family into a VW vehicle today.

Kroger, 2017

In June, 2017 Kroger came on my radar. Why? The news was making a big story about Amazon buying Whole Foods. What happened as a result made absolutely no sense to me. Shares of Kroger fell sharply.

I saw this and said, “what does Amazon buying Whole Foods have to do with Kroger selling apples and bananas?” It’s a very simple-minded way of thinking, but the result was that I picked up shares of Kroger for $23.00. The price continued to fall a bit more, but knowing that (A) Kroger was among the nation’s largest employers, (B) people were not going to immediately abandon the grocery chain they use, and (C) that the Amazon buy was simply not related to what Kroger was doing.

When the next quarterly report was released, Kroger bounced back to a higher price from which it fell, and is currently doing well. What happened is that when the Amazon news came out, people with no guts or sense freaked out, and others earned a nice gain, as well as dividends.

Rite Aid, 2018

Rite Aid has had issues lately. It’s become a penny stock, but may eclipse a dollar again. Its market cap is teetering at $1 billion, and the share price is about half what it was this time last year.

However, on October 30, 2018, while the share price was just over $1.00, shareholders voted to replace the board and withhold the CEO’s $3,000,000 bonus. The result was that demand for the stock increased temporarily. I’d purchased 7,300 shares before the shareholder vote on October 18 for $1.05, and sold most of them for $1.26 on November 8, keeping some of the profits in stock.

However, that little event, while sparking optimism, could not fix the whole company, because the $3,000,000 bonus was more of a gesture than a solution, which was why the share price fell so greatly afterward. However, recent earnings reports have led to increased demand for the stock. Add in the fact that people love the idea of a good stock for only a dollar, and that probably isn’t hurting its current upward trend.

But in the end, for the long-term health of the stock, it has to produce profits.

And that’s what makes a stock go up. In the very short-term, demand for the day has to be greater than supply, causing buyers to offer higher prices in order to get in on a good thing. Alternatively, when no one wants the stock, those who have it may sell off at a lower price just to save themselves before it’s too late.

Long-term, the idea is the same, but it’s not based on the 1-hour news cycle telling you that Elon Musk puffed a doobie, or that Volkswagen diesel (fossil fuel burning) engines aren’t as clean as they said they were. It’s about the business producing products people get good use of, and the companies being fiscally responsible.

Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of the Chief Counsel.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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