Given the extreme stock market conditions over the past year, it has been easy to lose faith in the basic principles of investing in shares.
The relationship between the fundamental value of companies and their respective share prices appears to have become detached in many cases.
Take, purely by way of an example, Stockcube.
The company is listed on AIM and involved in the provision of independent financial research.
In analysing the value of such a business, one would generally look at the strength of its balance sheet as well as its historic profit and predicted future profitability.
Stockcube has a long track record of profitability and cash generation.
As at June 30, the company had cash and cash equivalents of £2.59 million and total assets less current liabilities of £2.54 million.
However, £284,000 was held with Kaupthing Singer & Friedlander, which went into administration on October 8.
Stockcube's share price has collapsed to 11.5p, which translates to a market capitalisation of £1.1 million.
Even if none of the cash held with Kaupthing Singer & Friedlander is recovered, the shares trade at around half the level of net cash held.
This is by no means a unique story. It underlines the high level of fear in the market at the moment. On the whole the price of shares in smaller companies has been hit by a complete absence of buyers, which means that when sellers offload the price is often marked down severely.
It is somewhat surprising to see that more companies have not been buying back their own shares, particularly when upbeat results are met with apathy. In weighing up whether to invest in the stock market it is important to remember that a share is a small part of a real business and over the long term its value will ultimately reflect the financial performance of each company.
Of course, economic conditions are far from ideal and past performance can at times be very misleading.
A number of big names have already been hit very hard and it seems that the recession we have entered is continually looking more severe.
Under extreme conditions it may seem as though shares have become a complete gamble, but those who keep calm and evaluate companies sensibly will continue to build wealth through the stock market over the longer term.
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