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Amazon stock can handily have 40 dollar intraday price fluctuations, but if that happened to Snap or Fitbit, those stocks would go bankrupt. Is there a fundamental reason why price fluctuation sizes are a function of the level of the stock price?

EDIT: The comments as of now aren't answering my question, so I am going to clarify it.

Example: SNAP fluctuated 30 cents on on Friday, May 4, whereas AMZN fluctuated $20. I am asking why price fluctuations were of this size. The market does not have a mind of its own that says "oh it makes sense to move prices percentage-wise." I ask this question because in quantitative finance, there are both lognormal and normal models for interest rates and there is a great deal of debate on which one is better. At least for stocks, there can be some intrinsic reason lying in the company's balance sheet, cashflows, etc that induce price movements of that size.

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    It doesn’t make sense to look at the nominal price movement - look at percentages.
    – ssn
    May 6, 2018 at 19:20
  • @ssn I'm aware of this, but I'm asking why. In the interest rate world, we compute volatility based off of the absolute changes in the swap rate. One explanation could be that the Fed increases rates by 25bps no matter what the level is, so changes aren't a function of price level. Could one have a similar argument (using principles of financial accounting, valuation, etc) for why stock price changes should be viewed relative to the stock price.
    – user369210
    May 6, 2018 at 20:21
  • Firstly the price change in a company's stock price does not send it bankrupt. Secondly, a $40 change in a $1000 stock is different from a $40 change in a $100 stock. One represents 4% the other 40%. Just like a 10c rise in a penny stock might represent a 100% increase whist a 10c rise in Apple is nothing. What matters is the percentage move. If you own 1000 shares of a $1 stock ($1000) and the price increases by 10% you make $100. Similarly if you own 1 share of a $1000 stock ($1000) and the price increases by 10% you still make $100.
    – Victor
    May 7, 2018 at 5:08
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    Most people have an amount of money that they will invest in a stock, say $1000, they then divide this amount by the share price to determine how many shares they will buy. If the share price has a low value they buy more quantity, if the share price is a high value they will buy less quantity. In the end they have invested $1000 in both cases, and it is the percentage increase or decrease that will determine how good or bad their investment goes.
    – Victor
    May 7, 2018 at 5:12
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    @user369210 - you obviously are confused about many things, a stock going to $0 does not send a stock bankrupt, a company going bankrupt causes the share price to go to $0. A stock goes bankrupt because it has too much debt, it is loosing too much money etc. not because of its share price. Regarding your question - it has already been answered by everyone else who has posted on this question.
    – Victor
    May 7, 2018 at 6:47

3 Answers 3

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You need to understand how the value of the shares are derived. The market cap (shareprice x number of outstanding shares) is the market value of the firms equity. Shareprice can be expressed as the Net Present Value (NPV) of all future cashflows divided by number of shares.

Let's say the NPV of all future cashflows is 10,000 (estimated by the market) and the company has 1,000 shares outstanding.

Shareprice should be 10,000 / 1,000 = 10

Let's say that instead of having 1,000 shares the company has issued 100,000 shares resulting in a shareprice of 0.1.

Now consider if the market values the NPV as 11,000. 

The shareprice in the two scenarios would then be 11 or 0.11

This is the exact reason why you will not see "40 dollar increases in pennystocks". The actual shareprice doesn't really matter - what matters is how much the market values the entire company, regardless of how many shares it is split into.

That is why pennystocks doesn't suddenly increase by 40 dollars, because that would mean the market would value the company (the equity) many thousand times higher than it used to.

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    Thanks, THIS is the answer to the question I asked, not the other nonsense posted by everyone else.
    – user369210
    May 7, 2018 at 7:25
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Volatility is not necessarily a function of stock price.

Berkshire Hathaway (BRK-A), a much more expensive stock (in absolute terms, not in relation to earning), has a beta value of 0.89 while Amazon (AMZN) has a beta value of 1.72.

Beta value indicates the change in the stock price when there is a 1% change in the market index.

In fact, penny stocks are generally considered more volatile.

When comparing SNAP and AMZN, AMZN may drop/rise by 16 dollars and it would be about 1 percent change. To make similar fall/rise, SNAP price only needs to go down/up by around 10 cents.

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  • This doesn't answer my question, and beta is not volatility. Volatility for stocks is the instantaneous standard deviation of log returns.
    – user369210
    May 6, 2018 at 20:21
  • @user369210 Beta is not a measure of a stocks volatility??
    – NuWin
    May 7, 2018 at 2:06
  • @user369210 Beta coefficient is literally defined as volatility of a stock compared to market as a whole: en.wikipedia.org/wiki/Beta_(finance)
    – jitendra
    May 7, 2018 at 5:32
  • @NuWin no, beta is a measure of systematic risk to the market. No one prices AMZN options using the beta of AMZN to SPX.
    – user369210
    May 7, 2018 at 5:33
  • @jitendra en.wikipedia.org/wiki/Volatility_(finance)
    – user369210
    May 7, 2018 at 5:33
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Amazon's current stock price is about 1580 USD. A 40$ swing either way is about 2.5% variation. Fitbit is currently at 4.95 USD, meaning that a 40$ swing would be more than 800% variation.

As you surely understand, one should always look at the relative value of a price change.

Now, why do stocks of high value tend to move in higher increments ? Say you are bearish on AMZN, most likely you do not think the stock is 0.06% overvalued (1$ out of 1580$), more likely you think it is a few percentage points overvalued and therefore think the stock will drop multiple dollars. Reverse this for a bullish view.

Not the best explanation but I hope this illustrates it well enough.

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