Tag Archives: money

Taking Stock

Share price movements are kind-of-sort-of-rational but not always intuitive. For example, when Apple has a big keynote and announces some significant product, everyone expresses surprise that the share price goes down straight afterwards. Even many smart people get this wrong (“It isn’t based on logic and reason” – The Talk Show episode 53). I hope to explain why the price dropping actually does make sense in this post.

In doing so I’ll likely make some errors. Some of those will be deliberate simplifications. In other cases I’ll probably just be wrong. But either way, I think the gist, if not the details, should give you a good idea of what’s going on.

I’m going to keep things simple by only talking about the share price. There are other factors (such as dividends) that might reasonably be considered but I think we can get a decent enough explanation without complicating things.

If we only worry about the share price, the obvious way that you make money is by selling the share at a higher price than you bought it for. So, even when you first buy a share you’re making a punt on the future of the company.

For a keynote, where no actual financial information is shared, it’s a pretty simple case of “buy on the rumour, sell on the fact.” Traders heard some of the same rumours about the shiny new iUnicorn that you did. They speculated that people would like and buy this new product and bought some shares. By the time the product is announced, the theory is that the share price already factors in all the up side (profit) of it, so they sell.

It doesn’t matter whether the product is good or bad, better or worse than was predicted, the share price will likely still go down. The next bit of good news that will likely pump up the stock will be an earnings announcement, good launch weekend sales figures, etc., but no more good can come out of this announcement. So sell.

The process for an earnings call are similar though possibly are a little more technical. In addition to any sales figures, traders are also looking at things like the “earnings per share” (EPS). However, in common with a product announcement, at the point of the call, traders would generally consider all the good news to already be factored into the price. Even if the company beats expectations, there’s no more good news to be had so they may as well sell.

For the sake of completeness, let’s also consider a couple of other circumstances that can trigger significant variation in the price. These are typically financial in nature and if they happen at the same time as an earnings call or keynote can exacerbate any already significance price changes.

The most common are options, a derivative financial product that gives the owner the option to purchase a share at a price set in advance, pushing the real share price towards the option price. (A large number of people are going to have to buy the same stock at a set price, so that becomes the price.)

Something else that happens fairly frequently is a share price dropping by a certain amount causing algo trading systems to kick in a sell too. Combine this with the sell off after an earnings call or product announcement and the effects can be way out of proportion with what was announced.

The last one I’m going to mention is when a company is added to a well traded index, such as the S&P 500. This happens because many investors looking for relatively low risk (such as pensions) buy index funds, so as soon as you’re added to the index your shares suddenly become a lot more popular. (Sadly I worked for a company and had shares in it when the opposite happened.)

The short story here is that, unless you’re a professional investor, you probably shouldn’t buy shares to make a quick buck. Buy Apple stock because you like the company and expect to hold onto it for at least a few months. Don’t let the day-to-day peaks and troughs worry you.

Doesn’t add up

Today the Telegraph had an article claiming that “the top one per cent of British earners are now paying almost 30 per cent of all income tax.” It’s then painted as a bad, unexpected revelation. But I’m not sure that should be the case. In one of my mini-Ben Goldacre moments, I think it’s one of those areas where your intuition and the numbers don’t necessarily align.

This post isn’t about politics or fairness or even, really, taxes. Instead it’s about maths, because what the story fails to say is that you would absolutely expect a small number of high earners to foot most of the bill.

Let’s make some silly assumptions and see how the numbers work out:

  • Everyone pays the same 20% tax rate. We’re ignoring the tax-free component so that should work out to be considerably less than the rich pay but more than almost everyone else
  • We’ll say that 90% of people earn 20000. The national average is higher than that, but there are a lot of people who work part time and pay no income tax at all
  • And we’ll say the last 10% earn 60000. I don’t know how realistic that is as an average, but it’s nearer high-rate tax band cut-over than it is the millions that some CEOs and bankers get and it’s still a long way from the 50p tax rate

How do the numbers work?

The people on the lower income each pay 4000 in tax and the more comfortable pay 12000. But there are nine of the average people for every one of the rich, making the total take 4000 * 9 + 12000 * 1, or 48000.

So the high earner pays 12000 of the complete tax take of 48000, which is 25%.

(If you increase the tax rate on our hypothetical higher earner to 30% he ends up paying a third of all income tax.)

As I say, I don’t want to get into the fairness of it all, but a little maths, some wild assumptions and no research shows that, actually, the rich probably should be paying a reasonable percentage of the total income tax bill.

My delicious.com bookmarks for March 26th through March 31st

  • ‘Useless’ Is A Loaded Word – "In almost any life situation where you need to get something out of another person, being a dick is never the right method to go about it. Using loaded words like ‘useless’ or ‘worthless’ is being a dick. We will listen to your feedback and thank you for it, but unless it is some urgent issue that will affect every user, it’s most likely getting shoved to the bottom of the pile in favor of doing things to make the friendly customers happy."
  • Don’t blame inflation for all the price rises – Summary: food and gadgets are cheaper, entertainment is considerably more expensive.
  • We should stop running away from radiation – "A sea-change is needed in our attitude to radiation, starting with education and public information."

My delicious.com bookmarks for July 1st through July 8th

  • Evolution Test – I just don't get it. Is evolution really that hard? How can you misunderstand it so badly that you can come up with this list of questions and think it proves… well, anything? (Part of me hates to single out this site as there are dozens, if not hundreds, of similar ones.)
  • Crash Could Free Up Wall Street's Grip on Bright Young Minds – "But the big paychecks came with what economists call opportunity costs. Instead of spending their days searching for exotic trades, some of these Wall Street wizards could've been creating drugs, imagining software, or solving energy problems."
  • The Norway Lesson: The Benefits of Good Financial Behavior – "Norway made it a point to budget, to save, and to protect against unnecessary risk. Then, it went on to buy when everyone else was selling." Any other country would have spent all earnings from oil on tax cuts (that's what happened with North Sea Gas in the UK), but Norway did the smart thing.

My del.icio.us bookmarks for April 2nd through April 5th

  • The Cost of E-Voting – One of the many reasons that I am against e-voting machines: the cost. "The cost … increased 179 percent per voter on average." All that money for a less reliable system. Bargain!
  • Change we can believe in – I didn't realise that we were in line for some new coins. They look surprisingly good, certainly much better than the new US notes. (Originally from daringfireball.net)
  • Bali bombings: A sister's search for justice – I've always said that it's much easier to be against capital punishment when it's just an abstract idea. Here the sister of one of the Bali bombing's victims argues why she's still against it.