Misleading Stock Charts

by Odysseas Papadimitriou on March 31, 2009

Misleading ChartsAll the leading providers of online stock quotes (Yahoo Finace, MSN Money, Google Finance) supply a chart that shows the price of a stock over time.  This type of chart is handy for people who already own the stock as it allows them to track their investment as it rises and falls.  People who are hoping to invest, however, need to know the value of the company over time.  The current charts are not useful for this purpose and are actually misleading because they create a false impression of the company’s value over time.

As we all know, the market capitalization of a company is the number of its shares times its stock price.  The current charts used do not show how the value of a company changes when that company issues more equity (i.e., more shares) in order to raise more cash, a common practice in a recession.  These charts simply show the stock price.

Consider, for a moment, some company X that has 1,000 shares of stock on the market at a value of $30 a piece.  The company is worth $30,000.  If the company’s stock goes down to $10, it appears that the company is now worth 1/3 of its previous value, but that assumes that the number of shares has stayed constant (which in a lot of cases is a completely flawed assumption).  If the number of shares has increased to 2,000, then the value of the company is now worth 2/3 of its previous value.  Only by considering the number of shares in play can the company’s value be determined and the risk of investment be understood.

Given the number of users who rely on Yahoo Finance (7.8 million unique visitors per month) MSN Money (4.6 million), and Google Finance (454 thousand), these portals should have different charts available for current and prospective investors*. More specifically, we need a market capitalization chart and prospective investors need to be educated that a market capitalization chart is a much more useful chart when trying to decide whether to invest in a prticular stock.

*statistics from quantcast.com

Discussion

obenskik
They change the scale of the chart to fit the space, so a 0.5% dip or 50% dip look the same
August 12 at 16:15 pm
Cassy Fahey
Can you, well im in collage to become a algebra teacher, and were looking for misleading charts can anyone help me.
December 4 at 10:38 am
Alpha Trader
You can get market capitalization charts here as well as historical fundamental charts for most company metrics. http://ycharts.com/companies/AAPL
July 17 at 06:06 am

Relevant Articles

No Similar Posts

Most Popular Topics

Most Popular Articles

Subscribe

Receive the latest advice and deals:

Wallet Hub Facebook Twitter Google Plus

Submit A Post

Want to be a guest blogger? Submit a Post