Volkswagen Gains from Trading Tumult

09 October 2008

WOLFSBURG, Germany: Investors have been practising their art less with the invisible hand of Adam Smith and more with the spear of Ares in recent weeks. A beneficiary of this trend is Volkswagen, which has usurped Toyota as the world's largest auto company by market capitalisation.

The German firm is now valued at some €94.5 billion ($128.8bn; £73.7bn), and its share price increased by up to 55% earlier this week, before dropping back to close at 2% down.

However, this still means the company has a higher market price than Toyota, which recently announced cuts in production and is valued at €92bn. 
The increase in VW's stock is attributed to hedge funds and investors trying to cover "short positions" – the sale of borrowed shares, which are later repurchased at a lower price before returning them to the lender. 

When VW's share value rose, traders were forced to purchase stock in an effort to minimise losses after prices increased beyond the level at which they had originally sold their holdings.

Porsche currently owns around 35% of VW, and is aiming to raise its stake to over 50% by the end of November; the German region of Lower Saxony holds another 20%.

The limited number of "free floating shares" – those shares that are actively available to traders – also helped to drive VW's value up, analysts say.

Data sourced from Financial Times; additional content by WARC staff