The international stock markets, as every trader knows, are heavily reliant on information accessibility to determine their conditions. As soon as new information comes to light, traders will immediately seek to take advantage of any profit-making opportunities the new realities may present. Conversely, they will do their best to exit positions that may turn out to be riskier than they previously thought. All this takes place at the speed of information’s travel, which is almost instantaneous in today’s interconnected world, which makes financial markets highly responsive entities to changes in the world. This reality coupled with each investor’s constant efforts to predict future market trends and events when formulating their trading strategies, which is what ultimately sets the company’s valuations in the eyes of the market, makes investor behavior an unceasingly interesting topic of discussion.
These conditions make it possible for a company’s stock to lose value even in the event of record profits or exceptionally strong market positioning – if it doesn’t meet the expectations the market had for it, the market will adjust its opinions and the share price will drop. In extreme cases, the market is forced to make drastic adjustments to its valuations when seemingly impossible events occur that affect the market, such as natural disasters or the discovery of widespread fraud in major companies. These types of events have come to be referred to as Black Swan events due to their rare occurrence, and they can trigger some of the most shocking stock drops and increases in stock and forex markets imaginable. Here are a few notable examples.
The Volkswagen Surprise
In one of the most unexpected outcomes the financial markets have ever witnessed, the Volkswagen automobile company briefly became the world’s largest company based on market capitalization. Back in the early 2000s, Volkswagen had been operating independently in the automotive sector, and the German company’s prospects were looked upon very negatively by investors. As a result of this, its shares were inundated with an unusually high percentage of traders holding short sell positions, which means that they expected its value to drop in future. If it rose, then they would be exposed to massive potential losses.
What happened next is that on October 2008, Porsche announced that it had silently obtained a 74% ownership stock in Volkswagen on the derivatives markets over a long period of time. The unexpected revelation threw the market into a frenzy as traders sought to offload their holdings as quickly as they. Some trader went so far as to sell them for 1000 Euros apiece, which is what led to the company temporarily becoming the largest in the world in terms of market capitalization.
The Gateway Industries Story
This company specialized in the obscure field of providing database management software and services to national non-profit, publishing, and healthcare entities. It was initially valued at 1 cent per share and was not noted as an exceptional company in any way. Its only employee was its CEO Jack Howard, who hadn’t made a name for himself at the time.
Well, on February 11, 2011 , Robert F.X. Sillerman announced his intentions of acquiring the tiny entity as part of his wider strategy to widen his expansion visions. The world famous media entrepreneur’s interest in the company had an immediate effect on the company’s value, as traders familiar with Sillerman’s reputation flocked to buy share. The 1 cent stock rose by 20,000% to trade at $2.97 per share based on his reputation for savvy investment.
The Zynga Tragedy
Zynga is a company that develops online games in close partnership with Facebook and in the second financial quarter of 2012 it missed its earning projects by a massive margin and subsequently lost 40% of its share value in one day – a massive loss by any company’s standards.
Market analysts had forecast a healthy revenue of $344.12 million for the company and 6 cents of earnings per share (EPS). It turned out quite differently, by financial market standards. They earned just $332 million and reported only 1 cent earnings per share for their stakeholders. Its projections for the following quarter were even more dismal, and this triggered a massive bear run on the company’s stock that saw it drop from a price of $15.91 per share to $3.03. The market was quick to revise its opinion of the company after its poor performance, as the market unfailingly does.