Cisco, an IT company, has announced a plan to invest in a new factory, and on th
ID: 2755336 • Letter: C
Question
Cisco, an IT company, has announced a plan to invest in a new factory, and on the same day, the company's stock price jumped up by 1%.
(1) Describe a situation where this increase of the stock price may be interpreted as indicating that investors view the new plan as a bad idea.
(2) If the company's stock price went down by 1% on the day the plan was announced.Describe a situation where this decrease of the stock price may be interpreted as indicating that investors view the new plan as a good idea.
Explanation / Answer
(1) Describe a situation where this increase of the stock price may be interpreted as indicating that investors view the new plan as a bad idea.
Answer:
The stock price increases due to number of factors. Here in this case where investors sees new plan as a bad idea may try to hold on to the stock for some future capital gains thus decreasing the supply of the share in the market and making the price to jump by 1%.
(2) If the company's stock price went down by 1% on the day the plan was announced.
Describe a situation where this decrease of the stock price may be interpreted as indicating that investors view the new plan as a good idea.
Answer:
If investors perceives the plan as good then in that case they may try to book profit today to make the price fall down by 1%.