Stock Market Efficiency

In 1460 the first ever stock exchange was founded in Antwerp, Belgium and over the years there has been major growth of stock markets globally, with new markets appearing all around the world, in countries such as Sweden, France, the UK and Japan.

So that I’m not here forever discussing each stock market, within this blog post I will focus mainly on the London Stock exchange, which didn’t emerge until late 17^th century, however, has advanced significantly since then due to a few aspects such as; financial innovation, institutionalisation (meaning that shares aren’t just being bought by individuals and investment now comes from large blocks of pooled investment funds), the removal of domestic restrictions on financial markets and changes in technology.

When on the hunt to gain additional finance, companies may choose to issue shares on the stock exchange to gain investors on the basis that their company is already doing well financially. The way in which a company will issue shares is through an Initial Public Offering (IPO) on a primary market. Before an Initial Public Offering a company will only have small number of shareholders, which are usually the company’s founders or angel investors /venture capitalists. From here, in the secondary market any investor that purchases a share from a company of their choosing, has the ability to trade shares among themselves. In the long term, publicly issuing shares can be very beneficial to companies as it is a good way of raising capital so that the company can grow, however, the direct costs of initially issuing the shares can be quite high, sometimes even as high as 10% of the capital raised.

When it comes to companies owning stocks there are two types that they can possess; Cyclical and Non-cyclical. Cyclical stocks highly correlate to the economy, whereas non-cyclical stocks will still perform well even if economic growth slows e.g. supermarkets will still do well as food is an essential. In the last decade there has been a persistent bull market, which can be put simply as a market on the rise, companies that possess non-cyclical stocks will do better in a bull market but will have to be wary on whether or not it becomes a bear market (a decreasing market). One example of a non-cyclical company who has seen a severe decrease in share price in recent months is Superdry, as in October they issued a profit warning, placing blame on the high temperatures in the last year, leading to a decrease in sale of jackets and jumpers, therefore meaning they watched their shares fall as much as 20 percent down to 811.5p around the start of November, which has taken an additional dip in the last 18 days to 741p, making it a shocking decrease of 1299p since the beginning of 2018.

In my opinion if they don’t come up with a solution to fix their ever-falling share price fast then attracting new shareholders and keeping current ones will become extremely difficult. If the high temperatures really are to blame for their constant fall in share price, one way in which they could firstly stop the fall and then build back up to their high share price of just over £20, would be to try and increase their revenues on the ‘summer clothes’ that they offer, as relying heavily on jumpers and jackets for 45% of their annual revenue is just not sustainable if this pattern in weather continues.