Most of us are put off or confused when companies cite numbers as information. There are lots of details hidden in these numbers and understanding these figures is very important for an investor.
Even a little bit of confusion in reading them can lead to disappointments at a later stage because of non-achievement of expected targets. In most cases, simply adding up numbers does not work and the situation portrayed could be very different from reality. Here is a look at how this happens and the reason behind it.
Rise and fall
Often there is a rise in the price of an equity share and this is then followed by a fall. Most people try and understand the extent of the rise and the consequent fall to see the kind of net impact it will have on their portfolio. In many cases, the way things turn out shock an investor. For example, a percentage rise of a specific amount followed by a similar percentage fall will actually leave the individual worse off than what they started out as.
Consider an example where there is a share quoting at Rs 100 in the market. If there is a 50 percent rise in the value of the share then the price will touch Rs 150. This represents a 50 percent rise from the basic cost that was witnessed earlier and hence this is the gain for the investor. Now when the market has reached a high if there is a fall of a similar
percentage which is 50 percent then the price of the share will become half and from Rs 150 it will come down to Rs 75.
This even when the percentage rise and fall is the same the investor ends up losing 25 percent of the value that they actually started out with. This happens because the base price for the calculation of the gain is Rs 100 while the base price for the calculation of the fall is actually higher at Rs 150.
Fall and rise
The same situation can arise in case there is a fall in the value of shares followed by a rise. Here the impact on investors is greater because they realise that despite good recovery in the value, it is nowhere near the cost or value that they had witnessed earlier. This is true at the current moment where the rise in stock prices fails to match the sharp fall witnessed earlier.
For example if there is a share that was quoting at Rs 500 earlier and this has witnessed a 60 percent fall, as has been very common, then the price has come down to Rs 200. From this level, even a similar 60 percent rise in the price of the share will take it only to Rs 320. This is still a massive Rs 180 off the cost of the initial price or nearly 40 percent less. With each successive increase in the fall of the share price, the original value or cost for an individual seems further away. The reason for such a position is the same, which is that the base for the fall is larger while the base for the gain is smaller and this leads to a larger overall loss as far as an individual investor is concerned.