Explainer · Stock Market Basics
What moves stock prices up and down?
A stock price is the last price at which a buyer and a seller agreed. It moves when enough of them change their minds about what the company's future cash is worth.
Quick answer
Stock prices move when demand from buyers and supply from sellers shift [2]. That can follow news that changes expectations about a company's future cash payouts, or changes in interest rates that alter what investors require [3]. A largely anticipated Fed decision is already in the price [3].
Key points
- Strong demand from many investors tends to push a share price up, and heavy selling can leave your shares worth less than you paid [2].
- A share is a claim on a company's current and future dividends or other cash flows, such as buybacks, so news about those cash flows can move the price [3].
- Higher real interest rates make alternatives such as bonds more attractive and lower what investors will pay for stocks [3].
- A largely anticipated Fed decision gets little reaction because it is already in the price, and Fed research measured the effect of surprise rate changes [3] [7].
- Even a well-run company's stock can fall when many investors sell stocks broadly [4].
On this page
What actually sets a stock's price?#
Trading does. At any moment, some investors are offering to buy (the bid) and others are offering to sell (the ask), and the bid is almost always lower than the ask [1]. A trade happens when someone accepts the other side's price, and that trade becomes the new last price.
FINRA puts the result in plain terms: strong demand, from many investors wanting to buy a particular stock, tends to increase its share price [2]. If the company isn't profitable, or investors are selling rather than buying, your shares may be worth less than you paid for them [2].
That explains how the price moves, but not why buyers and sellers change their minds. For that, it helps to know what a share actually is. In a 2003 speech, Federal Reserve Governor Ben Bernanke described a share of stock as a claim on the current and future dividends, or other cash flows such as stock buybacks, to be paid by a company [3]. Almost every force on this page works through one of two channels: expectations about those future cash flows, or the return investors require for waiting and taking risk.
Why do company results and news move a stock?#
Because they change what investors expect the company to pay out over time. Bernanke's speech states that news that current or future dividends are likely to be higher than previously expected, for example because the company expects to be more profitable, should raise the current stock price [3]. The reverse also holds in the sources: a company's stock can fall because its revenue declines or it isn't being managed well [4].
Much of that news reaches investors through SEC filings. Public companies must file most Form 8-K current reports within four business days of the triggering event [5]. Events that require one include a bankruptcy filing, completing an acquisition, the departure of directors or certain officers, and results of operations, which covers earnings releases [5]. The SEC describes this information as generally material, meaning a reasonable investor would likely consider it important [5]. Our guide to SEC filings: 10-K, 10-Q and 8-K shows where to find them, and how to read an earnings report walks through the results themselves.
Dividends are part of the picture too. A company may pay dividends on common stock but doesn't have to, and it can cut or eliminate them [2]. A cut changes the cash flows a share is a claim on, which is why dividend news can move a price.
How do interest rates and the Fed affect stock prices?#
Through the return investors require. Bernanke explained that higher real interest rates make investments other than stocks, such as bonds, more attractive, which raises the required return on stocks and reduces what investors are willing to pay for them [3]. FINRA describes the same behavior from the investor's side: if interest rates go up, some investors might sell stock and use the money to buy bonds [2].
The size of the effect has been measured. A Federal Reserve working paper by Bernanke and Kenneth Kuttner found that, on average, a hypothetical unanticipated 25-basis-point cut in the federal funds rate target was associated with about a one percent increase in broad stock indexes [7]. The paper found that the biggest part of the response came from changes in expected excess returns, the extra return investors demand for holding stocks [7]. The speech put it more directly: the most powerful effect of an unanticipated tightening is to raise the perceived risk premium on stocks [3].
Note the word unanticipated. Bernanke said that any policy decision that is largely anticipated will already be factored into stock prices and will get little reaction when announced [3].
Why does economic data move the whole market?#
Because it changes expectations for many companies at once. FINRA's guide to economic indicators notes that an increase in durable goods orders is usually taken as a sign of economic health and could be associated with increases in stock indexes [9]. Increases in consumer confidence are sometimes associated with rising equity markets [9]. Lower interest rates can encourage borrowing and stimulate the economy [9]. Notice the hedges in those sentences: could and sometimes. None of these indicators moves stocks in a fixed way.
The most useful line in FINRA's guide is about comparison: how an indicator compares with a prior month or year, and how a reading comes in relative to expectations, is also critical [9]. A strong number that everyone already expected may barely register, which matches Bernanke's point about anticipated Fed decisions [3].
The table below groups the main forces by what they change.
| Force | What it changes | Direction |
|---|---|---|
| Buying and selling pressure | Demand for the shares | Strong demand tends to raise the price |
| Company news and results | Expected dividends and cash flows | Higher than expected should raise the price |
| Interest rates | Required return on stocks | Higher real rates lower what investors pay |
| Economic data | Outlook for many companies at once | Depends on the reading versus expectations |
| Broad selling | Prices across the market | Even strong companies can fall |
Sources: FINRA [2] [9], Federal Reserve [3], New York Attorney General [4].
Why can a good company's stock still fall?#
Because the price reflects the whole market's buying and selling, not just the company. The New York Attorney General's investor guide notes that a perfectly well-managed and prosperous company's stock could fall because lots of investors decide to sell millions of shares [4]. Prices fluctuate daily and over longer terms, sometimes dramatically [2].
Daily noise is large. Bernanke noted that over the five years before his 2003 speech, the broad stock market moved one percent or more on about 40 percent of all trading days [3]. Over longer periods, large company stocks as a group have lost money in about one out of every three years on average [8]. There is no guarantee that any company will grow, and you can lose money you invest in stocks [8]. Read more on volatility and on stock market risk.
When a stock moves sharply, a short routine helps you separate company news from market-wide moves before you react.
- Check whether the whole market moved
Compare the stock's move with a broad index the same day. A market-wide drop points to rates, data or broad selling.
- Look for a new filing
Search the company on EDGAR for a recent 8-K. Most must be filed within four business days of the event [5].
- Check the time of the move
After-hours prices may not reflect prices at the close or the next open [10].
- Ask what was expected
A result is news only relative to expectations [9]. A good number can still disappoint.
- Decide before you trade
A price move is information, not an instruction. Write down your reason before you buy or sell anything.
Mistakes beginners make with stock price moves#
- Reading a fall as proof the company is in trouble
A well-managed company's stock can fall when many investors sell at once [4].
- Trading on an after-hours price
After-hours news can have an exaggerated and unsustainable effect on the price [6].
- Treating one economic number as a signal
FINRA's own wording is hedged: indicators could be or are sometimes associated with market moves [9].
- Assuming a 9% drop needs a 9% rise to recover
From $36.40, it takes a 9.89% gain to return to $40.00 (calculated). Losses need larger percentage gains to undo.
Frequently asked questions#
Do stock prices follow earnings?
Why did the market fall when the Fed did what everyone expected?
Bernanke said a largely anticipated decision is already factored into prices and gets little reaction when announced [3]. If the market moves a lot anyway, look for what else changed that day.
Why do interest rates matter for stocks?
Can anyone predict short-term stock moves?
The sources here measure averages, not forecasts. Bernanke noted that even the roughly one percent effect of a typical Fed surprise is swamped by the overall variability of stock prices [3].
The bottom line#
Stock prices move when buyers and sellers change their view of a company's future cash flows or of the return they require to hold stocks. Company news, interest rates and economic data all feed into that, often through surprises, because expected news may already be in the price. Prices also swing for reasons unrelated to any one company, and every stock can lose value. Before reacting to a move, check the filings, check the market, and check the clock. Next, learn how to place a trade with market orders vs limit orders.
Sources
- Bid Price.
- Stocks.
- Remarks by Governor Ben S. Bernanke: Monetary Policy and the Stock Market: Some Empirical Results.
- Stocks | New York Attorney General.
- Investor Bulletin: How to Read an 8-K.
- 2265. Extended Hours Trading Risk Disclosure | FINRA.org.
- What Explains the Stock Market's Reaction to Federal Reserve Policy?.
- Stocks - FAQs.
- Key Economic Indicators Every Investor Should Know.
- Extended-Hours Trading: Investor Bulletin.
Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.
