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Are the stocks of competitor companies negatively correlated? e.g. if Sony goes up in price, will Samsung fall?

  • In addition to answers below, be cautious with your wording here - "if Sony goes up in price will Samsung fall?" Don't confuse a probability with a law of nature. Even if Samsung stock price has always dropped when Sony's rises, doesn't mean that it always will. It might mean that it is incredibly likely, but overconfidence in that likelihood may mask the true risk that something new may happen in the future. – Grade 'Eh' Bacon Jul 11 '16 at 15:53
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    See: "a rising tide lifts all boats" – Lilienthal Jul 11 '16 at 17:02
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    It seems like you may be thinking of markets like classic 0 sum game competitions, where any competitor can only improve his position at the expense of other competitor(s). However, markets are not generally 0 sum games, as pointed out in the answers, so perhaps you're asking the question based on an invalid assumption. – HopelessN00b Jul 11 '16 at 19:18
  • In general, companies within the same industry tend to have their stock prices move in the same direction over the long term. There may be short term differences as a result of earnings or any other news release,...but generally industries are affected by the same fundamental drivers. You may want to have a look at this article just to make sure you have the correct understanding of correlation: diversifyportfolio.com/blog/2017/02/20/what-correlation – darkpool Jun 6 '17 at 7:22
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Not especially. It depends on why sales have changed. If it's just consumer demand, that affects everyone in parallel rather than pushing in opposite direactions. If it's changes other than sales, that may have no effect on other companies. If it's because someone introduced the next must-have-it device and they're selling rapidly and drawing customers from the competing brands, maybe.

And that's all neglecting the fact that this may already have been incorporated into the competitor's share price long ago, in anticipation of this news.

Sorry, but the market just ain't simple.

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    I'd actually expect competitor companies to be strongly positively correlated. – ChrisInEdmonton Jul 11 '16 at 15:10
  • I think you should expand your comment into an answer, explaining why. – Pete B. Jul 11 '16 at 15:26
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    Grade 'Eh' Bacon has done a far better job of expanding on that comment than I could have done. :) – ChrisInEdmonton Jul 11 '16 at 16:00
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It is important to first understand that true causation of share price may not relate to historical correlation. Just like with scientific experiments, correlation does not imply causation. But we use stock price correlation to attempt to infer causation, where it is reasonable to do so. And to do that you need to understand that prices change for many reasons; some company specific, some industry specific, some market specific. Companies in the same industry may correlate when that industry goes up or down; companies with the same market may correlate when that market goes up or down.

In general, in most industries, it is reasonable to assume that competitor companies have stocks which strongly correlate (positively) with each-other to the extent that they do the same thing.

For a simple example, consider three resource companies: "Oil Ltd." [100% of its assets relate to Oil]; "Oil and Iron Inc." [50% of its value relates to Oil, 50% to Iron]; and "Iron and Copper Ltd." [50% of its value relates to Iron, 50% to Copper].

For each of these companies, there are many things which affect value, but one could naively simplify things by saying "value of a resource company is defined by the expected future volume of goods mined/drilled * the expected resource price, less all fixed and variable costs". So, one major thing that impacts resource companies is simply the current & projected price of those resources.

This means that if the price of Oil goes up or down, it will partially affect the value of the two Oil companies above - but how much it affects each company will depend on the volume of Oil it drills, and the timeline that it expects to get that Oil. For example, maybe Oil and Iron Ltd. has no currently producing Oil rigs, but it has just made massive investments which expect to drill Oil in 2 years - and the market expects Oil prices to return to a high value in 2 years.

In that case, a drop in Oil would impact Oil Inc. severely, but perhaps it wouldn't impact Oil and Iron Ltd. as much. In this case, for the particular share price movement related to the price of Oil, the two companies would not be correlated. Iron and Copper Ltd. would be unaffected by the price of Oil [this is a simplification; Oil prices impact many areas of the economy], and therefore there would be no correlation at all between this company's shares.

It is also likely that competitors face similar markets. If consumer spending goes down, then perhaps the stock of most consumer product companies would go down as well. There would be outliers, because specific companies may still succeed in a falling market, but in generally, there would be a lot of correlation between two companies with the same market.

In the case that you list, Sony vs Samsung, there would be some factors that correlate positively, and some that correlate negatively. A clean example would be Blackberry stock vs Apple stock - because Apple's success had specifically negative ramifications for Blackberry. And yet, other tech company competitors also succeeded in the same time period, meaning they did not correlate negatively with Apple.

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    Apple's success did greatly grow the smartphone market, but Blackberry's failure to do anything to convince anyone to choose them in that market sunk them. Had they managed to compete at a reasonable level, Apple's success could have helped Blackberry by encouraging more users to get smartphones from any manufacturer. Instead, they dismissed the iPhone as not a big deal and the stock quickly plummeted. – Zach Lipton Jul 11 '16 at 19:25
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In theory, say we had two soft drink companies, and no other existed. On Jan 1, they report they each had 50% market share for the past year. Over the next year, one company's gain is the other's loss. But over the year, for whatever reason, the market has grown 10% (all the stories of bad water helped this), and while the market share ends at 49/51, the 49 guy has improved his margins, and that stock rises by more than the other.

In general, companies in the same industry will be positively correlated, and strongly so.

I offer my "spreadsheets are your friend" advice.

I took data over the last 10 years for Coke and Pepsi. Easy to pull from various sites, I tend to use Yahoo. In Excel the function CORREL with let you compare two columns of numbers for correlation. I got a .85 result, pretty high. To show how a different industry would have a lower correlation, I picked Intel. Strangely, enough, Intel and Pepsi had a .94 correlation. A coincidence, I suppose, but my point is that you can easily get data and perform your own analysis to better understand what's going on.

  • Maybe there's a lot of silicon in cola drinks – user662852 Jul 12 '16 at 4:23
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    Seems like Intel and Pepsi is another example of Ice Cream Sales and Shark Attacks. – SGR Jul 12 '16 at 9:34
  • @SGR they both rise in the summer? – NuWin Sep 7 '16 at 4:05

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