Adjusting for new capital-issues.

Chart Forum » Does Technical Analysis Really Work? » Adjusting for new capital-issues.

«« Previous Next »»

Thread Start New Thread
Last Poster Posts Pages Last Post

Author

Message

dogalog

Member

Post Number: 712
Registered: 03-2004

Rating: N/A
Votes: 0


Tuesday, January 25, 2005 - 03:33 pm:

To most people maths is boring or incomprehensible.I apologise at the outset for asking what is basically a mathematical question.

Premise-Charts show price history that can be used for future prediction of movement.

Fact-Price x shares on issue[soi]=Market Capitalisation.

The question is if charts map Market Cap as well as they map price?
Problem-New issues,placements,preference share redemptions [in ord shares],buy backs etc etc affect Share Issue Number.Yes these all have a Short Term price effect.It is the Long Term that i am pondering.

A chart shows a 5 year ago price of $1,at that time 50mil SOI[shares on issue].NOW if today there are 100mil soi shouldn't that past price be adjusted to 50 cents?

Before you reach for your keyboard[or go What Rubbish!]can you see that $1 being its historical price is irrelevant?
Why?because it[a historical price]is preventing you from getting a true historical perspective regarding a trend in the LONG TERM.

I'm suggesting a long term trend may be defined by the increasing/decreasing of a Company's Market Capitalisation.Furthermore it is only by looking at the trend in Mark Cap that a TRUE perspective Long Term is gained.

I expect indifference and eagerly await negation on this question-Do you agree the history price of $1 5 years ago should be adjusted to 50cents Today if there is double the shares on issue today.

regards,
jr

kaveman

Member

Post Number: 71
Registered: 11-2002

Rating: N/A
Votes: 0


Tuesday, January 25, 2005 - 05:25 pm:

Generally the share price should be reconstructed according to the shares on issue
If a share split, restructure, issue occur the historical prices would be changed by the inverse factor of the share issue change. eg num shares double, historical price halves.
But I believe some people prefer to keep the price unadjusted, but not me.
Perhaps you just have some data that was not amended aas it should have been, quite common.

So based on the above
market cap = price * shares on issue
assuming if historic price has been adjusted for shares on issue then a trend of price would give the smae as trend on market cap.

graham

dogalog

Member

Post Number: 713
Registered: 03-2004

Rating: N/A
Votes: 0


Tuesday, January 25, 2005 - 07:00 pm:

greetings kaveman,
i do not have data that is not re-adjusted,i only see others always presenting data in such a state AND making analysis from such.
thank you for your quick response,i've noted that before.
Would i be wrong to think that you agree with my premise?
I'll assume so til differently advised.
regards,
jr

kaveman

Member

Post Number: 72
Registered: 11-2002

Rating: N/A
Votes: 0


Tuesday, January 25, 2005 - 08:48 pm:

In as far as market cap and price are going to move in exactly the same way as MC is price x constant, I agree

One of the down sides to the price adjustments that occur is when you have a volatility based indicator/method. Going from 0.5c price to 50c price means the minimum tick also gets artificailly inflated, or deflated in the opposite. It can give a totally incorrect result to any hitorical based decisions.
In my example above the price for a single tick move is say 0.5 to 0.6 cents. When adjusted this becomes 50c to 60c, and I do not see stocks around 50 cents having consistent moves of +/- 10 cents every day.

graham

hazluk

Member

Post Number: 166
Registered: 09-2002

Rating: N/A
Votes: 0


Tuesday, January 25, 2005 - 08:50 pm:

Hi dog' - I agree with your stance PROVIDED (as Kaveman's pointed out)the increase in the number of shares is a result of a share split.

If, however, there was a capital raising of say $1 per share, then there should be no adjustment because the company has quite literally increased its capitalisation with cold hard cash.

Haz'

dogalog

Member

Post Number: 714
Registered: 03-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 09:54 am:

Greetings hazluk and kaveman,
Market cap is price[$] multiplied by number of shares on issue[#SOI].Cash in the bank,assets purchased etc is not in the equation.Their effect is only in Shareholder Funds.

Therefore it is ANY & ALL increases in SOI not just share splits that i'm saying must be accomodated.Only in this way will movement up/down/steady of Market Cap be observable.

My proposition is that Mark Cap moves is a more reliable indicator than even the eye when looking at a 3 year chart say showing $1 price then and a 50 cent price now.
If the SOI has doubled in the 3 years you are not seeing the price halved but the Market Cap staying the same.

I feel that this is a "better" step in drawing conclusions about a share than the current 'vision' which i would describe as-"Wacko,this share was a $ three years ago,maybe it will be again" that gives no consideration or thought that this perceived price target requires a doubling of Market Cap[for it to again reach a $]

I hope i've made my position clearer.This is a LONG TERM mindset tool,that i'm discussing.I'm expecting a logic flaw to be revealed in it.Certainly there is no button I know of that can be pushed to bring it to actuality.

It all boils down in KISS terms as to whether movement of Market Cap is a valid trend indicator.If it is then past price adjustment must occur for true Long Term analysis.

regards,
jr

PS-kaveman,i was confused by your volatility point.i'm only long term;of course the actual price today is not adjusted til a new share issue in the future occurs to adjust market cap.

dogalog

Member

Post Number: 715
Registered: 03-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 11:27 am:

A clarification re Wacko paragraph.[4th in post above]
The punter is assumed to be educated enough to realise that for 50cents to double to the $,that of course the Market Capitalisation will have to double.
My point is that perhaps the punter looks at the 3 year ago price and is 'misinformed' in thinking it's happened before it has possibilities/probabilities to happen again[that price'n' mark cap will double]

OK?
ps- isn't wacko a lost australianism.Once it meant good/fabulous,now it's degenerated into a rhyme with jacko.Tragic really.
Enjoy your holiday.
jr

(Message edited by dogalog on January 26, 2005)

holycow

Member

Post Number: 741
Registered: 08-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 12:46 pm:

Dr,

I must have swallowed quite a few magic mushrooms last night in my supper... try as I may I have problem focussing on this issue. So I am going to give a general blah hopefully this shot gun approach would contribute to your thread somewhat.

1) In TA, I think(this means may be only me) the focus is in price/volume study. In its purest form - TA guys don't even bother with fundamentals. I for one has evolved from a purist to a Maccombo by checking on both TA and FA and now... I have further evolved... into a cow!

So the gist is this - it's price and volume data that matter.

In chart, when you see a price of 28.75 (say NAB's closing), it means there were many buyers/sellers traded at this price. They are REAL. And because the stock really costs this much to each of them, each trader/investor would have some form of memory or attachment to this price. At this point, I don't believe anyone really care about NAB's market capitalisation unless they have abundant resources and have a fear that the stock has been trading out of control due to churning.

Now let's say someone bought this share and hold it for 10 years (yes, instead of looking back, try looking forward), do you think this price of 28.75 is real to them or not?

I am quite willing to bet they will remember this price but won't have a clue to NAB's capitalisation now or in the course of the next ten years - this, in effect makes market capitalisation a very poor TA indicator.

To really account for every new issues and/or get the stock price adjusted accordingly I think is the task of the bean counters, and unless the buyer/seller is into some kind of M&A and they have to be loaded with $$$ first - which effectively rules out 99% of the small time stock traders like us... so again my view is Market Cap is not quite relevant in TA (to me, anyway).

2) TA and chart in my view provide us a glimpse into the logical and emotional makeup of the market at a particular point in time. Comparing with pure FA, there is one aspect (the emotion involved) of the trade or stock pricing the FA guys are not getting. So to level that out, they choose to focus in long term where all the daily/weekly fluctuations due to short term emotional/speculative activities are filtered out such that their LOGICAL VIEW of a stock/company they are trading in (yes they trade too - long term) would settle down on its fundamentals (financial or intrinsic).

My cocked-eye view of a FA guy is he is a purist in logic and arithmetics. He delves in numbers and loves every single digit of it. The cheaper the stock price goes the more excited he would become assuming he sees value. Contrast that to the TA guy who trades on breaking out and momentum - a totally different type of ball game and rules we are talking about here.

3) And here is my direct response (hope you don't mind) - you are looking at TA from a FA's point of view. I am not sure if it is the right thing to do but I have a feeling you are not focussing in the right track.

Cheers.

ps: if you find my tone too patronising... sorry. It's just the way I write. I need to eat more humble pie... I know.

HC

"... if you've got a chart, I have an opinion!"

deanrosario

Member

Post Number: 536
Registered: 11-2002

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 02:06 pm:

JR - you've raised a very interesting discussion point.

In my view, you are absolutely right - for the long term investor, a chart depicting market capitalisation would be a very valuable tool.

A comparison of market price with market cap over a period of time would provide a nice picture when assessing which companies have been good / bad at utilising their share capital.

Dean

PS: In my view, historical share prices should only be adjusted to reflect a change in SOI if the change in SOI is not accompanied by a change to the balance sheet.

DRPs, new issues, bonus issues all bring about changes to the balance sheet so there is no need to adjust the historical price of the share - the company after the new issues is different to the company before the issue so we are not comaparing apples with apples.

However, share splits or share consolidations do not affect the balance sheet so there needs to be an adjustment to the historical price since nothing about the company has chaged and we need to compare apples with apples.

(Message edited by deanrosario on January 26, 2005)

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." George Soros

dogalog

Member

Post Number: 716
Registered: 03-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 02:11 pm:

Holy Cow,
Technically you are funda mentally in error.
I'll back this assumption with more detail later/tomorrow.
I hope i'm not offensive in saying you really should get out more.
Have you had enough WACKO times,HC?
regards,
jr

kaveman

Member

Post Number: 73
Registered: 11-2002

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 04:38 pm:

Dogalog
here is a chart, hopefully of AAE which demonstrates the effect of share consolidation (think that is right word)

dogalog

Member

Post Number: 717
Registered: 03-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 05:16 pm:

Thank you kaveman,
i have not yet absorbed your chart.Is it complete,a brief glance made it seem not enough information?

I've returned specifically for Holy Cow.HC there is a maxim[words to live by]that you should not let the sunset on your wrath.I've adapted that saying to be don't let the sun go down on the smug.

Your NAB example?it's rubbish.
1996-NAB 1.427 billion SOI;Market Cap$16 billion.

2004-NAB 1.551 bil SOI;Mark Cap$44 bil.

therefor as kaveman pointed out above ,the SOI[shares on issue] has remained relatively static over the 9 years.
Market Cap is tracking the price change over time only,that is the factor.
## soi CHANGE is not significant over these near decade of years.
please do not call me a fundamentalist bean counter again,HC.I've been known to use sticks 'n'stones if words fail me!!
regards,
jr

ps hc-i hope you don't go squawking and mooing back to your paddock.i await the next thing that just pops into your head but i wish you'd read and absorb the points.
I'm gritting my teeth so i'm
o
f
f

.

edit-sorry dean just noticed your post.Will frame reply tomorrow.Basically I'm thinking Small Cap shares being adjusted for all issues.

(Message edited by dogalog on January 26, 2005)

holycow

Member

Post Number: 742
Registered: 08-2004

Rating: N/A
Votes: 0


Wednesday, January 26, 2005 - 07:43 pm: