Why stock prices move
Prices move on surprises: news that changes what investors expect.
Price = what people expect
A share's price reflects what investors collectively expect about a company's future profits, and how much they are willing to pay for them today. When expectations change, the price changes.
That is why a company can report record profits and its stock still falls: investors had expected even more. Markets react to the gap between reality and expectations, not to good or bad news alone.
The big drivers
Earnings: how much profit a company makes and what it says about the future. Expectations: the forecasts already baked into the price. Interest rates: when rates rise, safe savings and bonds pay more, so stocks have more competition, and future profits are worth less in today's money. Higher rates can also slow the economy. Falling rates tend to work the other way.
News and events: new products, lawsuits, elections, wars, economic reports like jobs or inflation numbers. Mood: fear and greed can push prices further than the facts justify, in either direction.
Short-term noise, long-term signal
Day to day, prices bounce on news and emotion. Over many years, a company's price tends to follow its actual ability to grow profits, though with no guarantee and plenty of exceptions.
Analysts expect a company to earn $2.00 per share this quarter. It reports $1.90, up from $1.50 a year ago, a 27% increase.
Growth is strong, but it fell short of the $2.00 expectation by 5%. The stock may well drop, because the price had already assumed $2.00. Real-world reactions vary, but this gap between result and expectation is often what moves prices.
Key terms
- Expectations
- What investors already predict will happen, which is built into today's price.
- Earnings
- A company's profit over a period, usually reported every quarter in the US.
- Interest rates
- The cost of borrowing money. Changes in rates affect how attractive stocks are versus safer options.
Prices move when reality differs from what was expected.