By Leo Williams, Contributor
Leo Williams, managing director, JMMB Securities Ltd. - Contributed
This is another in a series of articles from JMMB Securities Ltd. that addresses key questions about how to invest successfully in the stock markets of Jamaica and the Caribbean. We explore the question of what causes prices to move on the stock market and how to interpret information which may affect the stock prices in the market.
CONVENTIONAL wisdom states that news items on listed companies will influence the price at which stocks trade on the Jamaica Stock Exchange (JSE). If the announcement is positive and significant, we should expect to see the price of the stock move upward as that information gets spread throughout the market.
By contrast announcements of lawsuits against a company, or increased competition or loss of market share and other problems should each reflect in a lower trading price immediately after that negative information gets into the market.
Our research effort undertook an analysis of one stock in particular to see if this expected link between the stock price and news does really show up in practice. We studied Cable & Wireless stock over the period of May 16 to August 14, 2002. During this time the stock had a trading frequency of 100 per cent meaning there was trading activity each of the 62 days that the market was open. We also reviewed all of the articles in the news on Cable & Wireless as a company. The source was the Business Observer On-Line and the Gleaner On-Line websites. We eliminated any information that discussed sporting events sponsored by the company as they were estimated not to have any impact directly on the daily stock prices. We identified 19 such news articles that were assessed would have some impact on the price of the stock. All that remained was to see:
if the impact expected from the news did show in a movement in the stock price,
if the direction of that movement corresponded to the flavour of the news and
how consistently price movement and direction coincided with the price movement. The best way to assess this relationship is graphically as done in the chart below. What we conclude from this is that indeed, when there is positive news from the perspective of the company on the JSE, the price did move upward in response. When the news was negative, it was possible to see soon afterwards a move downward in the stock price.
In conclusion, information and its availability is the central engine that moves market prices of a stock and we see evidence that this engine is working well in this case of the JSE and one of its listed companies. With this evidence, it is important that investors play the important role of consistently seeking out this type of information when making investment decisions. The media also plays an important role in this effort by reporting financial and competitive information that affects stock prices when it is available.
One area for improvement is that the market needs more immediate, regular and widely disseminated information on earnings announcements and dividend decisions for Jamaican listed companies. While this information comes readily from the listed companies to the JSE by fax and to the brokerage community, the brief reports that are available by fax usually make it into the broad media on a delayed basis. Investors are encouraged to seek news items of this type from their brokers either by direct phone contact or electronic means such as emails or websites in order to make use of the best information available when making investment decisions about which way stock prices are likely to move near term. Armed with this information, investors can have confidence that the JSE market efficiency is improving and is increasingly predictable. As a result, investors will have more confidence in their investment decisions and the markets ability to deliver on its promise of good returns and performance over time.
Source: Equity Analysis of JMMB Securities Ltd.
Leo Williams is Managing Director JMMB Securities Ltd.
