Why stock prices move

A stock's price changes every second the market is open. The reasons can look mysterious at first, but they come down to one idea: what buyers and sellers are willing to do, and why.

Lesson 2 of 76 · 3 min read

Supply and demand

A price moves when one side is more eager than the other. If more people want to buy a stock than to sell it at the current price, buyers have to offer more to get shares, and the price rises. If sellers are more eager, they have to accept less, and the price falls. That is supply (shares offered for sale) meeting demand (money wanting to buy).

A simple example: a stock trades at $50. Good news comes out and buyers suddenly want 500,000 shares, but only 200,000 are offered at $50. Buyers raise their bids to $51, $52, $53 until enough holders are tempted to sell. Within minutes the stock might be at $54. Nothing about the company changed in those minutes; the balance between buyers and sellers did.

Expectations versus reality

Prices are set by what investors expect about the future, not only by what is true today. A stock price already includes the market's best guess about a company's future profits. So what moves the price is the surprise: the difference between what happens and what was expected.

This explains something that confuses many beginners. A company can report profits up 30% and the stock falls, because investors expected 40%. Another company can report a loss and the stock jumps, because the loss was smaller than feared. Good news that everyone already expected is often called "priced in".

Earnings, news and sentiment

Over time, the strongest driver of a stock is the company's earnings: its profits. Every three months U.S. companies publish a quarterly report with sales, profits and often a forecast called guidance. These days bring some of the biggest moves of the year, often 5% to 20% in a single session. You can see upcoming reports on the Earnings calendar.

Other news matters too: a new product, a big contract, a lawsuit, a change of CEO, interest rate decisions by the central bank, or economic data like inflation and jobs.

Then there is sentiment: the mood of investors. When people feel optimistic they pay more for the same company; when they are scared they sell even good businesses. Fear and greed can push prices far above or below what the numbers alone would justify, at least for a while.

The role of big institutions

Mutual funds, pension funds and hedge funds control most of the money in the market. When one of them decides to build a position in a stock, it may need to buy millions of shares, which can take weeks. That steady buying lifts the price and usually shows up as heavy volume (the number of shares traded) on up days.

When institutions sell, the opposite happens. An individual with $10,000 cannot move a large stock, but thousands of funds acting together can. This is why traders watch volume closely; you will learn how in reading volume.

Cheap, expensive, noise and value

The price of one share tells you almost nothing on its own. A $20 stock is not cheaper than a $400 stock; it may simply have more shares. What matters is the price compared with what the company earns and how fast it is growing. A stock that fell from $100 to $40 is not automatically a bargain either: it may have fallen because the business is getting worse.

Also separate short-term noise from long-term value. Day to day, prices bounce around with headlines, rumors and big orders. Over months and years, they tend to follow the growth of profits. A company that doubles its earnings over several years usually sees its stock rise substantially, while a company whose profits shrink rarely holds its price. That is why this school combines charts (to read demand now) with earnings growth (to judge the business).

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