10% Rule in Share Trading

Thenarrator on 10/02/2022 - 00:40
Last edited 10/02/2022 - 15:42

A 10% rise in a stock price is not the same as a 10% drop in a stock price. i.e.

if you bought a stock for $100 and it goes to $90, it has gone down 10% (you lose 10%).
In order to go back to $100 so you can break even, it now needs to go up 11.1% which seems a lot harder.

So what i dont get is, say you bought a stock for $100. After ASX announces a bad news, it has dropped 10% to $90. Say tomorrow, ASX said they made a mistake & retracted the bad news, should the stock price theoretically go back up to $100 or should it go up by 10%?

Cant really wrap my head around this.

——————— Edit
So many comments about "unknowns, uncertainties, what ifs, it depends" which is true but not the intent of this topic.

The market reacts to people's speculations and an uncountable number of variables that affect the stock price. Yes.

For this topic, I'm trying to paint a purely theoretical, 100% efficient market scenario for discussion. If a share drop is 100% purely attributed to a negative news announcement and if we completely reverse that negative news, ceteris paribus, in a 100% efficient market, without any transaction costs, no sentiment plays, all market players are machines, will the share price go back to original price or would it go back up based on % increase?

Think of this as a thought experiment rather than a practical discussion on your trades

Financial

Comments

  • MS Paint on 10/02/2022 - 00:44
    +6

    Yes

    • Danstar on 10/02/2022 - 06:29

      I'm gonna go with….. no

      LOL

      • djones145 on 10/02/2022 - 09:05

        maybe

        • JDMcarfan on 10/02/2022 - 11:05
          +1

          conditions apply

    • SF3 on 10/02/2022 - 13:04

      Often a day trader becomes an investor from this maths.

  • vinnychase on 10/02/2022 - 00:52
    -1

    Your Answer

  • dcep on 10/02/2022 - 01:16
    +2

    stock price is not maths

    • EightImmortals on 10/02/2022 - 08:32
      +7

      This. There is very little logic behind stock price movements and I can pretty much guarantee that they are all manipulated in some way or the other. The best you can do is watch which direction the whales are moving this and grab some morsels from their greedy jaws along the way.

    • Shleepy on 10/02/2022 - 11:13

      Actually, stock prices as discussed by the OP is maths: They are talking about the difference between the geometric mean (which is what actually happens with stocks) versus the arithmetic mean (which is what people think should happen).

  • rektrading on 10/02/2022 - 01:17
    +2

    The market isn't a Jojo. It doesn't go -10% to +10% because the news changed in 24h.

    • AustriaBargain on 10/02/2022 - 01:45
      +1

      Unless that news is Elon Musk sticking his foot in his mouth on Twitter.

      • rektrading on 10/02/2022 - 01:47

        His tweets don't move the market anymore.

  • plmko on 10/02/2022 - 01:41

    What's there not to understand about losing money?

  • RockyRaccoon on 10/02/2022 - 07:10

    So it messes with your head.

    Its all said here. (ripped off from Wikipedia)

    Mark Twain popularized the saying in Chapters from My Autobiography, published in the North American Review in 1907. "Figures often beguile me," Twain wrote, "particularly when I have the arranging of them myself:

    'There are three kinds of lies: lies, damned lies, and statistics'

    In other words it all depends on the context.

    Something all politicians know so well and voters forget so easily

  • MrThing on 10/02/2022 - 07:35
    +1

    stockmarket is the stockmarket

    maths is maths

    they are not the same. 1 involves peoples opinions, human nature and beliefs. the other is maths, its always the same, 1 + 1 is always 2.

  • bloom on 10/02/2022 - 07:38
    +3

    Buy low, sell high
    Now your the wolf of wall street

    • L0zBargain on 10/02/2022 - 08:55
      +2

      Just need a Margot Robbie

      • holdenmg on 10/02/2022 - 09:05
        +2

        Yes, I just read OzB for the "articles" lol

  • avoidfullprice on 10/02/2022 - 08:05
    +1

    ASX doesn't announce bad news. The company does press releases.

    Company retracting bad news pretending nothing has happened? Doubt stock price will go back to $100.

    Politician popularity doesn't return simply saying I categorically deny the allegations

    • dcep on 10/02/2022 - 15:38

      asx can halt trading … put up query … or investigation

  • rektrading on 10/02/2022 - 08:08
    -5

    I don't see what the problem is here.

    A -10% dip is an opportunity to buy the same asset -10% cheaper.

    BTFD.

    • MITM on 10/02/2022 - 13:43

      a 10% dip becomes the current market price - if you paid above todays price yesterday - you overpaid by 10%, and who's to say todays price isn't looking overvalued tomorrow.

      • rektrading on 10/02/2022 - 13:51
        -1

        People are so fixated on the 5 min chart that they don't see the big picture.

        Zoom out and see the potential of momentum up to the right.

        My CSL went down to high of $330 to $290 then went back up to $309 now $250ish all within the last 2 years. Not really caring that much now I am DCA into index because I am not checking every stock that makes up the index.
        https://www.ozbargain.com.au/comment/11745698/redir

        Just buy and hodl. That's it.

  • Mr Haj on 10/02/2022 - 08:54
    +1

    ASX controls the share price by announcing "a bad news"? Interesting.

  • Krankite on 10/02/2022 - 08:57

    Yes 10% of 100 is more than 10% of 90.

    Where you are wrong is the idea that the market reacts based on percentage, that's just an easy way to normalise the change when stocks are all priced differently. What is actually happening is the major investing house's are using modern day scrying to come up a dollar value of what a share is worth and then issuing buy orders if the market price is below their estimate and sell orders if market price is above the estimate. The market price then stabilises somewhere within the range of error.

    Car analogy is you want to buy a car (2020 Toyota Camry SL AUTO) Redbook has a price guide of $36300 to $39600, It is also saying = $500 for frosted white paint. so lets put the price at $40000 for a pristine model. But then the seller calls us to say sorry the paint is actually just plain white, now the car is only $39500 a drop of 1.25%. Next day he calls back and say's it actually is the premium paint the price does the price go back up $500 or does it go back up $493.75 (1.25% of 39500)

    Of course with real markets it gets complicated If the seller isn't even sure about the paint colour maybe I start questioning whether the car is well maintained so maybe the cars value is closer to the lower end of the guide that the top so I may ask to split the difference and say $39750.

    • MS Paint on 10/02/2022 - 09:02
      -1

      Can you create an analogy to explain your analogy please?

      • Crow K on 10/02/2022 - 09:35
        +7

        Let's say you've listed your 2020 Toyota Camry SL AUTO on the ASX, but the PDS lists it as having frosted white paint.

        If the car gets dinged while entering the roundabout from the wrong lane, there's going to be a bad news announcement and 10% of shareholders will be legally required to sell their shares.

        But what if there's a MS Paint diagram that confirms the car had right of way at the time? That's right, 10% of the people who sold their shares will buy the remaining 40% of the outstanding cryptotokens, mint them as ToyotaNFTs and of course it's on the blockchain forever (that's a feature, not a bug).

        Unless the 2020 Toyota Camry SL AUTO pays the gas fees in person, it faces the risk of further bad news being announced.

        And that's how babies are made.

        • MS Paint on 10/02/2022 - 09:54
          +2

          That makes sense. Cheers

        • brendanm on 10/02/2022 - 18:17

          Let's say you've listed your 2020 Toyota Camry SL AUTO on the ASX

          Does it pay dividends though?

  • Crow K on 10/02/2022 - 09:13
    +3

    It's a tricky issue. I'd email the ASX directly and ask them to send you a copy of the 10% rule.

  • jv on 10/02/2022 - 09:17

    So what i dont get is, say you bought a stock for $100. After ASX announces a bad news, it has dropped 10% to $90. Say tomorrow, ASX said they made a mistake & retracted the bad news, should the stock price theoretically go back up to $100 or should it go up by 10%?

    Read up on Technical Analysis

  • nfr on 10/02/2022 - 10:21
    +1

    After ASX announces a bad news, it has dropped 10% to $90.

    I don't like platitudes but correlation is really not causation. How do you know the bad news explained all 10% of the drop? Maybe the bad news only caused only 8%, and there was another negative event that you didn't know. Or maybe the bad news was already fully priced in and the entire drop was actually due to something else.

  • netjock on 10/02/2022 - 10:49
    +1

    Cant really wrap my head around this.

    Simple math. Your denominator changes from 100 to 90.

    Just buy the index, sock it away and pull it out in 10 - 20 years. Don't have to worry about individual stock performance.

    My CSL went down to high of $330 to $290 then went back up to $309 now $250ish all within the last 2 years. Not really caring that much now I am DCA into index because I am not checking every stock that makes up the index.

  • payless69 on 10/02/2022 - 10:55

    As Warren B. confirms: Stay away from clutter!

  • JDMcarfan on 10/02/2022 - 11:08
    +3

    this deserves an article on motley fool or better still betoota advocate

  • AndyC1 on 10/02/2022 - 11:08

    You need to learn more about the stock market and as such stay aware from it until you understand it.

  • zoombie on 10/02/2022 - 11:34
    +3

    The stock will goes down even further after retractions. Why? The market will think the people behind the company are idiots, can't even manage a press release let alone run a listed company :p

  • Thor Bargain God on 10/02/2022 - 12:37
    -1

    Jeez guys, the price of a stock is purely governed by how many buyers and sellers there are for a stock. That can change at any second of any day and you can't always find a rational explanation for it. It is called a "market" for a reason. There are a lot of theories regarding how efficient the market is to pricing in news etc. but many people are in the camp of the market NOT being totally efficient. Not everyone might be aware that the mistake that the ASX made is directly attributable to the stock's decline, and a 10% plunge in the stock might have freaked a few people out (particularly traders as opposed to investors) and they might have cut and run. Sometimes stuff like this spooks people. It is not easy to draw a conclusion that the market would go straight back up for that stock, just because the ASX notifies of an error. The people who sold out probably took their money and invested in something they think is better than this stock, thereby crimping future demand and price recovery. You might also find that other macro factors, such as news of the day, like a war breaking out in Ukraine, or other activity in the sector this stock is in can influence demand and supply of the stock. Even the market itself can move in the absence of news. For instance, if a lot of people bought something and it went up 50% in a short period, many of them might decide to sell and take profits at a certain point, which could trigger a major selloff, simply by virtue of the price reaching a certain level. Chartists also buy and sell stocks they know nothing about, purely based upon the movement of the share price and patterns or calculations they apply. I was going to compare to house prices but they're not the best analogy either.

    I don't want to be disparaging but there are so many amateur speculators in the market these days that if we had another GFC, the amount of damage to these people's finances would be immense. My advice is to embrace traditional wisdom that has worked for 200 years or so when it comes to investing. There is always a new generation of kids who talk about there being a new paradigm in the market but these are the people who have been wiped out every time there has been a major collapse every decade or two. Because things work for a little while, a lot of the younger crowd get cocky and a bit brazen when presented with advice from people with experience and know what they are talking about. There are so many pitfalls. It takes a GFC or a dot com bubble to shake some sense into the market at times. As a millennial, I'm not that old but this "diamond hands", "hodl", "wall st bets" environment has the potential to go very bad when the right catalyst comes along. Usually this advice never cuts through and people just have to learn by experience unfortunately. After all, I'll admit that it has happened to me to some extent along the way. At least it doesn't look like the kids have gone too nuts with excessive leverage yet. My advice would be to seek out some good books by people who have been there and done that and learn how to do proper technical analysis. "Simply Wall St" is an OK tool for doing technical analysis, but you need to also understand what a lot of the underlying ratios mean, like Return on Equity (ROE), Debt to Equity etc. It might sound boring but do you think that taking short cuts is a better approach? Warren Buffett summed things up best by saying that the vast majority of people who do not have the time and inclination to do proper research and evaluation are better off just holding a low cost EFT (such as VOO) that mirrors the performance of the S&P 500. Trading stocks based off charts is another approach to investing, but the best of the best in this area have worked out that they have only been right 76% of the time, so use this statistic to weigh up your chances of success, armed with less experience, time and knowledge. Hope people don't take offense and this may be of use.

  • MITM on 10/02/2022 - 13:38
    +1

    $100 stock - $10 = -10%
    $100 stock + $10 = +10%

  • brad1-8tsi on 10/02/2022 - 14:57

    There is often no logic to stock movements or why investors/traders buy or sell.

    AGL released their half year numbers at 8.20am today. Shortly after the 10.00am market open they gained ~2%. 5 hours later with no other announcements they have reversed ~4.5% from this mornings high of $7.82 and sit around $7.30. Somebody out there thinks the company/ies (when they demerge in June) has legs, others think otherwise.

    Company announcements are just one minor item that affects share price. Often emotion outweighs facts.

  • Thenarrator on 10/02/2022 - 15:39

    Of course the market reacts to people's speculations and an uncountable number of variables that affect the stock price.

    I'm trying to paint a purely theoretical, 100% efficient scenario for discussion. If a share drop is 100% purely due to a negative news announcement and if we completely reverse that negative news, ceteris paribus, in a 100% efficient market, without any transaction costs, will the share price go back to original price or would it work on % increase?

    Think of this as a thought experiment.

    • Crow K on 10/02/2022 - 16:01

      It will go back to the number of holders before based on # people, not % of total owners.

      If I'm sitting in a 2020 Toyota Camry SL AUTO with my wife and cut a massive fart, the car will lose 50% of its occupants temporarily.

      After the air clears, the car doesn't fill up by 50% [half a person doesn't get back in].

      In terms of the price, it would stay where it was (10% lower than previously). The price went down when the people who thought it was overpriced at $X sold it to people who were happy to have it at that newer price. People who want to get back in wouldn't be able to buy any shares [because all the existing holders are happy with the current price], unless the new owners wanted to take a profit, etc. Then they'd make money selling the shares back and it would climb up to $X again [assuming everyone who bought in cheap gets back out].

  • MrMarket on 10/02/2022 - 19:39

    "So what i dont get is, say you bought a stock for $100. After ASX announces a bad news, it has dropped 10% to $90. Say tomorrow, ASX said they made a mistake & retracted the bad news, should the stock price theoretically go back up to $100 or should it go up by 10%?
    wrap my head around this"

    Except this doesn't happened in real life Stock market is highly regulated under the Corporations Act
    ASIC regulates the Corp Act and ASX regulates Listing Rules

    there maybe instance of pump and dump with penny stocks but large business it just doesn't happen, there are seriously consequences releasing false information, ASX can suspend your stock from trading if you don't satisfied its listing rules, you also lose your reputation with the market and this can be very damaging and once that happened, directors jobs are the one to lose next.

    every years dozen of business get suspended because they are breaching ASX rules.

    Stock prices move for many reasons, pump and dump, insider trading, FOMO, fundamentals, shorting, take over speculation, bull run, bear down turn, crashes and hundred of other reasons.

    I been in the stock market for over 20 years, a lot of that stuff are just noises
    if you know what you are doing none of this matter, you will becomes rich over time

    the few people I know that lose money in the stock market are traders and the hyperactive that reacts to headlines and noises

  • Some Guy on 18/02/2022 - 00:23

    There's plenty of reverse logic on the stock exchange.

    Company posts a good profit, share price gets whacked because shareholders expected better. Company posts a loss, share price goes up because investors see better days ahead. CEO resigns, share price could go either way regardless of reason.

    Lot of volatility these days and there's no formula. Your guess is as good as mine. But remember trying to pick the bottom will just get you smelly fingers.

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