Keep a grip while prices get out of hand

STOCK MARKET INVESTMENT: Shares often seem to move in strange ways. Ken Welsby unravels some of the reasons

If You are following a company's share price with a view to dealing, or tracking the FT-SE index to get a general view of the market, it can be hard to understand why prices fluctuate so much.

If you had shares in Thorn, for instance, the 42.5p crash in its share price recently was an immediate and obvious reaction to a profits warning. But many other movements are much less obvious and easy to understand.

It is this uncertainty that deters many people from putting their savings in equities, despite the long-term returns, which should be far better than almost any other investment.

London is one of the world's three leading stock markets, along with New York and Tokyo, and the performance of London and New York is often closely linked. But Eric Hathorn, director of research at Henderson Crosthwaite, a stockbroker, says that if you look only at the movements of an index you could assume a huge volume of business was being done when in reality trading was quite thin. Following a share price before investing is essential, he says. "If it varies from the market, ask why. Is it doing better or worse than other companies in the same sector - those which are in a similar line of business or selling to similar markets?" The share price is not the only indicator that matters: you should also look at the yield and the p/e ratio (the share price divided by last year's earnings per share).

For many investors, he says, it isn't necessary to understand the detail of how share values are calculated. Rather, it is their message that matters most.

"If you are invested in a particular share for which the rating has got above those of its peer companies, is it time to sell and take profits? Get into the habit of looking at the sector averages and comparing the figures with your own holdings." These figures can be found in the FT- SE Actuaries Industry Sectors table on the back page of the Financial Times.

But it is not just individual company performance that affects its share price. Good or bad news of one company has a knock-on effect on others in the sector, so if one company is the subject of a bid the shares in competitors will be marked up in the expectation that they, too, may catch a predator's eye.

Then there is "market sentiment", which is governed by factors such as the outlook for the UK and world economies. Here, says Mr Hathorn, there is one key influence: the yield on the American Treasury's 30-year bond, which provides a benchmark for investment markets.

The yield on the "Long Bond" only needs to rise or fall by a small amount for equity markets to move in the opposite direction.

That explains why economic data from Washington, such as the monthly employment figures, is so widely, and rapidly reported. So the next time you are wondering why the price of your Marks & Spencer shares has moved unexpectedly, the culprit could be one of those regular bulletins from Uncle Sam.