What makes a stock price go up or down?

In the short run a stock price is simply the last trade. Every share sold has a buyer, so “more buyers than sellers” is not quite right; what differs is urgency. When buyers are willing to pay the ask while sellers wait for their price, trades happen at higher and higher prices. When sellers are the ones in a hurry, they accept lower bids and the price slides.

Over weeks and months, that urgency follows a handful of forces, each covered below:

  • Supply and demand in the order book: who is willing to trade, at what price and in what size.
  • Earnings and expectations: what the company earns compared with what investors had already assumed.
  • Interest rates: the return available elsewhere, and the rate used to value future profits.
  • The whole market: index moves, fund flows and beta pull most stocks in the same direction.
  • News and sentiment: new information, and how hopeful or fearful investors feel about it.
  • The supply of shares: new shares issued, shares bought back, and blocks of shares that become free to sell.
Order book
The list of open limit orders for a stock: bids to buy at or below the current price and asks to sell at or above it, with the number of shares at each price.
Price discovery
The process by which trading between buyers and sellers finds the price at which a stock changes hands, as new orders and new information arrive.

How does the order book set the price? A worked example

The order book holds every waiting limit order. The gap between the best bid and the best ask is the bid-ask spread, and the deeper view of the book is often called Level 2, explained in Level 2 and time and sales.

In the drawing at the top of the page, hypothetical XYZ last traded at $50.00, and sellers are offering 300 shares at $50.02, 200 at $50.03, 400 at $50.04 and 500 at $50.05. A buyer sends a market order for 800 shares:

  1. The first 300 shares fill at $50.02, the cheapest offer, which is now used up.
  2. The next 200 shares fill at $50.03.
  3. The last 300 shares fill at $50.04, leaving 100 shares offered there.
  4. Average price paid: (300 × 50.02 + 200 × 50.03 + 300 × 50.04) ÷ 800 = $50.03. The last trade, the price every screen shows, moved from $50.00 to $50.04. Nobody decided that price: one impatient buyer moved it, and a thinner book would have moved further for the same order.

Why can a stock fall after good earnings? Expectations vs results

By the time a company reports, its price already reflects what investors expect. The report moves the stock by how far it lands from those expectations and by what it changes about the future. The earnings season guide lists the usual reasons a beat can still fall; the arithmetic below shows the most common one.

In the drawing below, analysts expect hypothetical XYZ to earn $1.00 a share this quarter, and it reports $1.05, a 5% beat. But management lowers its forecast for next year from the $5.00 investors expected to $4.60, which is 8% less. If investors keep paying 20 times next year’s earnings, the price moves from 20 × $5.00 = $100 to 20 × $4.60 = $92, down 8%. A good quarter, and a lower price.

It works in reverse too: a company can miss this quarter and rise if its outlook improves. To read the numbers behind this, see how to read an earnings report and the P/E ratio.

Priced in
Already reflected in the stock price. News that investors widely expected is usually priced in before it is announced, so its release moves the price little.
Guidance
A company’s own forecast of its future revenue or earnings, usually given with quarterly results. A change in guidance can move a stock more than the quarter just reported.

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Three cards for hypothetical XYZ. This quarter’s EPS: expected $1.00, actual $1.05, +5% in green. Next year’s EPS: expected $5.00, new guidance $4.60, −8% in red. A yellow card, price at 20× next year’s EPS: before $100.00, after $92.00, −8% in red. A note reads the quarter beat, but the price follows the outlook.

How do interest rates affect stock prices?

Interest rates reach every stock at once. Higher rates make safe alternatives such as Treasury bills more attractive, raise borrowing costs for companies and consumers, and raise the rate investors use to discount future profits, so the same earnings are worth less today. Lower rates work the other way, though not automatically, because rates often fall when the economic outlook is getting worse.

Stocks whose profits lie far in the future feel this most. The bond yields and stocks lesson works through the discount-rate arithmetic, the Federal Reserve and stocks guide explains where rate decisions come from, and inflation and the stock market shows why one monthly report can shift rate expectations within minutes.

Why do most stocks move with the market? Beta and index flows

On many days the biggest force on a single stock is the market itself. News about rates, the economy or one of the largest companies moves the S&P 500 and the Nasdaq, and most stocks go along. Beta measures how strongly a stock has tended to move with the market: a beta of 1.5 means it has moved about 1.5% for each 1% move in the index, on average.

In the drawing below, the index falls 2% on a day with no company news. From the market alone, a stock with a beta of 0.5 would be expected to fall about 1%, a beta of 1.0 about 2%, 1.5 about 3% and 2.0 about 4%. Beta is calculated from past prices, so it changes over time and real days differ; treat it as a rough measure of how much market risk a stock carries.

Money flows add to the effect. Index funds buy and sell all their holdings in proportion when investors add or withdraw money, so large flows can push many stocks together whatever their own news. A stock added to a major index usually sees buying from the funds that track it, and a stock removed sees selling.

Beta
A measure of how much a stock has tended to move when the market moves, estimated from past prices. A beta of 1 has moved in line with the index, above 1 more, below 1 less.
Market risk (systematic risk)
The part of a stock’s risk that comes from the market as a whole, such as rates, recessions or panics. Owning more stocks does not remove it, unlike company-specific risk.

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The index falls 2% in a day, with no company news. Four bars hang below a zero line: beta 0.5 at −1%, beta 1.0 at −2%, beta 1.5 at −3% and beta 2.0 at −4%, the last two in red, beyond a dashed line marking the index at −2%. A card reads move from the market alone ≈ beta × index move, and 1.5 × (−2%) = −3%. A note reads beta is an average from past prices: real days differ.

How do news, sentiment and the number of shares move prices?

News is new information: a product launch, a lawsuit, a takeover offer, an analyst upgrade, a change of chief executive. Prices adjust fast, often within seconds, and news released overnight can make a stock gap at the open. Sentiment is how investors feel about that information: in fearful markets bad news tends to hit harder, and in euphoric ones good news is rewarded more, which is what the fear and greed index tries to capture.

The number of shares matters because profits are split among them. In the drawing below, hypothetical XYZ earns $500 million on 100 million shares, $5.00 a share. If it issues 10 million new shares, the same profit gives $500 million ÷ 110 million = $4.55 a share, 9.1% less, which is called dilution. If it buys back 10 million shares instead, earnings per share rise to $500 million ÷ 90 million = $5.56, up 11.1%. Large blocks of shares becoming free to sell, for example when insiders’ lockups end after an IPO, can also weigh on a price for a while.

Dilution
The fall in each existing share’s claim on profits when a company issues new shares, for example to raise cash, pay for an acquisition or pay employees in stock.
Market sentiment
The overall mood of investors toward a stock or the market, from fearful to greedy. It shapes how strongly prices react to the same news.

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Three bars of EPS for hypothetical XYZ with the same net income of $500 million, shown on a card with EPS = net income ÷ shares. Issues new shares, 110M shares: $4.55, −9.1% in red. Today, 100M shares: $5.00. Buys back shares, 90M shares: $5.56, +11.1% in green. A note reads the same profit split over more shares is thinner for each one.