A year of market volatility has clearly taken its toll on a number of stocks with 60 of them down 96% or more since last Diwali. The general market performance will of course get the headlines but the extent to which individual stocks have underperformed is a very telling indicator of just how disparate the performance of companies can be in the same market cycle.
For investors the numbers are a sobering reminder that the market doesn't move in a straight line. You can have a very stable market overall with major indices flat or even up, and yet individual stocks can be in freefall as a result of company specific issues, changes in the business and shifts in sentiment.
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What's behind the sharp fall in these stocks?
Stock prices are driven by a number of things: company earnings, business performance, level of debt, sector trends and the wider economic climate. If a company is reporting poor results or is in a difficult position operationally then investors will obviously be in a position to revalue it.
Market sentiment can also be a factor. In times of uncertainty investors will tend to reduce their exposure to stocks they perceive as risky and this can lead to increased selling pressure. Smaller companies, especially those with low trading volumes, can see their prices move more dramatically in such circumstances.
A sharp fall doesn't necessarily mean that every company in that sector is in the same state. You've got to look at each stock on its own merits, in terms of its financials, its business and what's going on with it.
Why should investors pay any attention?
A fall of as much as 96% can have a massive impact on a portfolio, particularly if a large chunk of your money is in a few key stocks. It also underlines the fact that you need to know the underlying business of the company you're investing in rather than just looking at what it's done in the past in terms of share price or market movement.
Investors should look at the key metrics (revenue growth, profitability, debt, cash flows, management commentary) before making any decision. They should also ask themselves whether the share price decline is simply a matter of temporary market pressure or whether it's actually a sign of a more fundamental problem with the business.
What can investors learn from this market trend?
The performance of these 60 stocks is a clear illustration of the value of diversification and risk assessment. It's entirely possible to hold shares in a range of different sectors and different businesses in the hope of reducing your exposure to the performance of any one company. Of course diversification doesn't get rid of risk.
Investors must be wary of making decisions based purely on sharp price movements. A share trading at a lot less than its previous high is not necessarily undervalued. You have to understand why the price has fallen in order to assess the investment properly.
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Conclusion
The 60 stock decline of up to 96% since last Diwali is a clear illustration of the impact that market volatility can have on individual companies. For the investor the lesson is to look beyond the headline figures, to look at the underlying fundamentals and to make your investment decisions based on your own research and your own risk profile.
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