Beginner4 min readThe Stock Market for Beginners · 4/11
Why Do Stock Prices Go Up and Down?
A stock price is not a number set by the company or the exchange. It is the last price a buyer and a seller agreed on. Every move you see means one of them changed what they are willing to pay or accept.
What you will learn
Understand how buyers and sellers move the price.
Know the main things that change their minds: earnings, news, the market and interest rates.
See why a stock can fall even when profits rise.
The lesson as a short video · 24 seconds · Watch on YouTubeIn this lesson
At any moment some people want to buy a stock and others want to sell it, each with a price in mind. A trade happens when a buyer and a seller meet at one price, and that price is what you see on screen as the last price.
If buyers are keener than sellers, they accept paying a little more to find someone to sell to them, and the price rises. If sellers are the keen ones, they accept less to find a buyer, and the price falls. The number of people alone is not what counts: the more aggressive side, with more shares, can push the next trades higher or lower.
Buyers are keener
First seller asks10.00
Buyers take everything he offered; the next seller asks10.10
Last price becomes10.10 ▲
Sellers are keener
First buyer bids10.00
Sellers fill his whole order; the next buyer bids9.90
Last price becomes9.90 ▼
Same stock, same starting point. The more aggressive side can push the next trades higher or lower.
ExampleAn invented company, Al Wadi Foods, last traded at EGP 10.00. One seller offers 5,000 shares at 10.00 and another offers at 10.10. Buyers arrive wanting 8,000 shares right away. The first 5,000 fill at 10.00 and the remaining 3,000 at 10.10. The last price is now 10.10: the stock rose 1% without the company itself doing anything.
What changes people's minds?
So the real question is: why would a buyer pay more today than yesterday, or a seller accept less? There are four big reasons you will meet often.
1Earnings and expectationsHow much will the company earn ahead?
2NewsA new contract, a problem, a disclosure
3The whole marketThe general investor mood
4Interest ratesWhat do lower-risk options pay?
All of these change what buyers will pay and sellers will accept
Four different causes, one result: the price people are willing to trade at changes.
Earnings and expectationsExpectations for the company's future earnings are an important part of how the market values the stock. If people come to expect bigger profits, they may accept paying more for the share.
NewsA big contract, a new plant, a lawsuit or a surprise disclosure. News makes people redo their sums quickly.
The whole marketSometimes the whole market rises or falls together on economic news or investor mood, and a stock gets pulled along even with nothing new at its company.
Interest ratesWhen bank interest rises, some investors may prefer lower-risk bank products to stocks. When it falls, stocks look more attractive to some of them.
The price looks ahead
What moves the price is not the news alone but the gap between the news and what people expected. If everyone expected profits to grow 40% and they grew only 20%, the stock can fall even though profits really did rise.
Watch outDo not try to explain every small move during the day. Much of the up and down is just a large buyer or seller finishing an order, with no news behind it. And nobody can know for certain where the price goes tomorrow.
See what moved today
Open the list of today's biggest movers, pick one, and look at its news and disclosures: is there a clear reason, or is the move happening with no news?