The mainstream media reported share market losses due to the Whitehaven hoax as being in the the vicinity of $300 million. But what does this extraordinarily large number represent and does it validly depict losses on the day?
Post-hoax, actions were described by the media as a drop in market capitalisation of $300 million. What's not explained is market capitalisation is calculated by multiplying the share price by the total number of shares issued, to determine the market value of a company. So this $300 million "loss" was calculated by comparing the value of 100% of the shares at the lowest point on the day with the value of 100% of the shares at the highest point on the day.
It's not real money, folks. Nothing like 100% of the shares changed hands on that day.
A more accurate number can be calculated by multiplying the volume of shares sold at various discounted price levels on the day. But before we get there you need to remember that for every "loser" there is a corresponding "winner". For every person or institution who sold a share cheaply based on erroneous data, someone else got a good buy based on their willingness to take a risk.
This is the way the share market works. Any share transaction needs a buyer and a seller who can agree on a price. That price must represent a potential profit opportunity to both of them in order for them to agree to the transaction. The fundamental truth of the duality of the market seems to have been overlooked in the media coverage.
So what was the value of shares sold on the day? To calculate this I used freely available trading data from ASX online. There were two major drops recorded in the Whitehaven share price on Monday, January 7.
- By 11am the share price had dropped from $3.51 to $3.31 on a volume of 1,172,800 -- representing an actual drop of $234,560 (1,172,800 x $0.20).
- After a slight rally up to $3.38 by 12.30pm, the shares then dropped to a low of $3.27 at 12.40pm. The volume of trade here was 749,700, so in dollar terms equal to $82,467 (749,700 x $0.11). By 2pm that day the shares had climbed back to $3.52, which was just above their starting point for the day.
So on total losses (or total gains depending on your negativity disposition), the worst case scenario was around $320,000. This is a lot less than the $300,000,000 reported in the mainstream press, but of course it doesn't make such an interesting story.
That figure is rubbish.
A final useful -- and unreported -- fact is the value of Whitehaven shares have dropped by 37% all on their own over the past 12 months, so a 9% dip for part of a day is really a flea bite compared to their overall trajectory. Maybe shareholders who ditched their Whitehaven shares have done themselves and their investment portfolios a favour after all.