Imagine a stock that falls fifty percent one day and rises fifty percent the next day. Seems like you’d have broken even, right? Wrong. This is the beauty of mathematics, and it occurs in the stock market all the time. While this shouldn’t be a significant problem for your investments, it can often be misleading and confusing when researching and analyzing stocks.
Let’s use the example of a recently volatile stock known as E-Trade Financial (ETFC). The stock price experienced a large sell off and dropped to $8.59 per share, a 58.7% drop. The next day a rally occurred in the stock market and E-Trade’s stock soared up 40.9%. This left the stock at $5.00 at the end of the day. This is a key example of how the percentage mathematics used in stock prices can easily be misleading to casual investors.
Now let’s break down this problem in simpler terms. Suppose you bought XYZ stock at $10 per share. It remains around $10 per share and suddenly it falls 80% one day due to a sell off and ends the day at a meager $2 per share. The next day, the aggregate stock market sentiment is the stock was oversold, so a rally occurs and the stock soars up 50%. If you were a long term investor during all this madness, you’d still be down significantly. A 50% rally in a $2 per share stock will only result in a $3 stock price. Which means despite the face value of 80%-50%=30%, you are actually down 70% on your investment of XYZ stock because the price per share ultimately went from $10 to $3.
Investing in the stock market is confusing enough already to the amateur investor in today’s conditions; So always keep this in mind when you research and analyze stocks as this is an easy mathetmatic occurrence to forget about or overlook.