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KembaraXtra – Islamic Derivatives: Why Share Price Decreases When a Company Incurs Losses
🔹 Key Idea
👉 Share price reflects the value of the company
👉 When a company incurs losses → its value decreases
✔ Therefore, share price falls
🔹 1. Lower Profit = Lower Value
👉 Investors buy shares to earn:
🔸 When Company Makes Loss
👉 Investors expect less return
✔ Demand for shares decreases → price falls
🔹 2. Negative Market Expectations
👉 Loss signals problems like:
👉 Investors think:
✔ So they sell shares
🔹 3. Supply and Demand Effect
👉 When many investors sell:
👉 Price automatically drops
🔹 4. Reduction in Company Net Worth
👉 Loss reduces:
👉 So:
✔ Share price reflects this lower value
🔹 5. Risk Becomes Higher
👉 Loss means:
👉 Investors require:
✔ If not achievable → they sell → price drops
🔹 6. Simple Case Example
👉 Company incurs losses
👉 Investors sell → price drops to RM7
✔ Loss in company → loss in share value
🔹 Islamic Finance Insight
👉 This is acceptable in Islam because:
👉 Loss is part of ownership risk
🔹 Simple Summary
👉 Share price falls because the company becomes less valuable
🔹 Final Exam Insight
👉 “Share prices decline when companies incur losses because investors expect lower future returns, leading to reduced demand and a decrease in the company’s perceived value.”
🔹 Key Idea
👉 Share price reflects the value of the company
👉 When a company incurs losses → its value decreases
✔ Therefore, share price falls
🔹 1. Lower Profit = Lower Value
👉 Investors buy shares to earn:
- Dividends
- Future growth
🔸 When Company Makes Loss
- No profit to distribute
- Dividends may be reduced or stopped
👉 Investors expect less return
✔ Demand for shares decreases → price falls
🔹 2. Negative Market Expectations
👉 Loss signals problems like:
- Weak management
- Poor sales
- Economic issues
👉 Investors think:
- Future performance will be worse
✔ So they sell shares
🔹 3. Supply and Demand Effect
👉 When many investors sell:
- Supply of shares ↑
- Demand ↓
👉 Price automatically drops
🔹 4. Reduction in Company Net Worth
👉 Loss reduces:
- Company assets
- Retained earnings
👉 So:
- Company becomes less valuable
✔ Share price reflects this lower value
🔹 5. Risk Becomes Higher
👉 Loss means:
- Business is riskier
👉 Investors require:
- Higher return for risk
✔ If not achievable → they sell → price drops
🔹 6. Simple Case Example
- You buy shares at RM10
👉 Company incurs losses
- No dividends
- Poor future outlook
👉 Investors sell → price drops to RM7
✔ Loss in company → loss in share value
🔹 Islamic Finance Insight
👉 This is acceptable in Islam because:
- ✔ Profit and loss sharing
- ✔ Real business performance
- ✔ No guaranteed return
👉 Loss is part of ownership risk
🔹 Simple Summary
- Loss → lower profit
- Lower profit → lower demand
- Lower demand → lower price
👉 Share price falls because the company becomes less valuable
🔹 Final Exam Insight
👉 “Share prices decline when companies incur losses because investors expect lower future returns, leading to reduced demand and a decrease in the company’s perceived value.”
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