Managing my money
Managing my money

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Managing my money

5.3.4 Share price volatility

All shares do move up and down in prices – with these movements often reflecting the general swings in stock market indices. But for some shares these movements are less extreme than for others.

The reason for this is that some companies are expected to make profits each year and for these profits to be relatively stable. This may be because they produce things people always need to buy – for example utility companies or supermarkets. Additionally their size may make it difficult for new entrants to enter their arena of business and reduce their sales and profits. So the prices of the shares in these types of companies are less volatile as investors have greater certainty about their financial performance. Their shares can still fall in price but such falls will tend to be lower than average for the share market as a whole.

By contrast companies whose sales and profits are prone to material change from year to year will have more volatile share prices. Investors know less about what to expect and the announcement of good or bad financial performances can therefore have quite dramatic effects – in both directions – on the companies’ share prices. Companies whose market share can be eroded – perhaps quickly – by new entrants or changes to technology, like biotechnology companies, are particularly likely to have share prices that are more volatile than for the share market as a whole. Mining is another sector where share prices are volatile, with the profits of companies in this sector exposed to changes in world commodity prices.

So we ask the question again: are you a risk taker or risk averse? If the former you might be inclined to dabble in mining shares if the latter you would stick to utilities and sleep easier.

Figure 7

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