Why Prices Move

Why this matters

Every day, prices rise and fall, and every day someone offers an explanation. Some explanations are right, some are guesses, and some are invented after the fact. Knowing what really moves prices helps you tell the difference, and helps you stay calm when a price moves for reasons that have nothing to do with the business you own.

In the moment: orders

At the most basic level, a price moves because of the balance of orders. If more people want to buy at the current price than want to sell, buyers have to offer more to get shares, and the price rises until enough sellers are willing. If sellers are more eager, the price falls until enough buyers step in. That's supply and demand, playing out in the bid and ask from the last lesson.

That explains how a price moves. The more interesting question is why buyers or sellers suddenly become more eager.

Underneath: expectations about the future

A share is a piece of a business. Over the long run, what a business is worth depends on how much money it's expected to make in the future, and how confident investors are in that expectation. So when investors change their view of a company's future, they change what they're willing to pay for its shares.

This is why prices can move on news that doesn't change anything today, like a new product announcement, a lost contract, or a forecast from the company itself. They change what investors expect later. Parts 3 and 4 cover how to think about a company's future earnings, and Price vs. Value covers why the market price and the underlying value can differ.

Surprises matter more than news

Investors spend a lot of effort anticipating what will happen. By the time good or bad news arrives, much of it may already be reflected in the price. What moves the price is the surprise: the gap between what was expected and what actually happened.

Scenario	Investors expected	STU Corp reported	A plausible reaction
A	Profit of $2.00 a share	$2.00	Little change
B	$2.00	$2.30	Price rises
C	$2.00	$2.10, but a lower forecast for next year	Price falls

STU Corp is fictional. In scenario C, profit beat expectations, yet the price fell, because the company's own forecast lowered what investors expect in future years. "Good news" and "the price went up" aren't the same thing.

Forces that move whole markets

Some forces move nearly all stocks at once, regardless of how any single company is doing:

• Interest rates. When rates rise, safer investments like savings and bonds pay more, and money expected in the future is worth less today. Both can weigh on stock prices. Time Value of Money and Discount Rates explains why.
• The economy. Expectations of growth or recession change what investors expect companies to earn overall.
• Mood and money flows. Fear and optimism spread across a whole market. When many investors want to buy or sell at once, prices can move far beyond what any change in the businesses would justify.

This is why even a well-run company's shares can fall on a bad day for the market. The price reflects the company and the environment around it.

A lot of it is noise

Many daily moves don't have a meaningful cause at all. Large investors adjusting their holdings, automatic trading, and ordinary randomness all move prices a little every day. Over short periods, noise is often larger than anything to do with the business itself.

Key takeaways

• In the moment, prices move because buyers or sellers are more eager at the current price.
• Underneath, prices reflect expectations about a company's future earnings.
• Prices react to surprises, the gap between expectations and results, more than to news itself.
• Interest rates, the economy, and market-wide mood move almost all stocks together.
• Much short-term movement is noise, and predicting it reliably is very hard.

Check your understanding

A company reports record profits, but its share price falls 6% that day. Which explanation fits this lesson best?

1. The market made a mistake that will be corrected tomorrow, once investors read the full report.
2. Record profits are bad for shareholders.
3. Investors had expected even more, or the outlook for future years got worse.

Interest rates rise sharply, and most stocks fall, including ones whose businesses didn't change. Why might that happen?

1. Safer investments now pay more, and future profits are worth less in today's money.
2. Companies must pay the higher interest rate to their shareholders as well as their lenders.
3. Stock exchanges charge more to trade when interest rates are high, so prices drop.

What's next

With so much money moving through markets, rules and referees matter. The next lesson, Who Regulates the Markets, covers who makes the rules and what they do and don't protect you from.