Ever wondered why some stocks skyrocket while others plummet? I’ve spent years tracking market movements, and the answer isn’t as straightforward as many think. No single person sits in a control room with buttons labeled “up” and “down” – instead, a complex interplay of forces determines stock prices.
The Truth About Stock Price Movements
Stock prices are constantly changing, driven primarily by supply and demand in the market. When more people want to buy a stock than sell it, the price moves up. When more people want to sell than buy, the price goes down. But who exactly controls these forces?
The short answer: Everyone and no one.
Let’s dive deeper into the key factors that really determine if a stock goes up or down.
Three Main Forces Behind Stock Movements
According to investment experts, three main categories of factors influence stock prices:
- Fundamental factors
- Technical factors
- Market sentiment
Understanding these influences can help you anticipate price movements and make better investment decisions. Let’s explore each one.
Fundamental Factors: The Building Blocks
In an efficient market (which rarely exists perfectly), stock prices would be determined primarily by fundamentals. These boil down to
- Earnings Base – Usually measured as earnings per share (EPS)
- Valuation Multiple – Often the price-to-earnings (P/E) ratio
When you buy a stock, you’re essentially purchasing a share of all future earnings that company will generate. The valuation multiple represents how much you’re willing to pay for those future earnings.
The Earnings Base Explained
While EPS is the most common measure, other ways to evaluate earnings power include:
- Free cash flow per share
- Dividends per share (for mature companies)
- Industry-specific metrics (like FFO for REITs)
Valuation Multiple Breakdown
The valuation multiple expresses expectations about the future. It’s based on:
- Expected growth in the earnings base (higher growth = higher multiple)
- Discount rate used to calculate present value of future earnings (higher discount rate = lower multiple)
The discount rate itself is influenced by:
- Perceived risk (riskier stocks = higher discount rate = lower multiple)
- Inflation (higher inflation = higher discount rate = lower multiple)
- Current earnings level
- Expected growth rate
- Inflation effects
- Risk assessment
Technical Factors: The External Forces
If only fundamental factors determined stock prices, investing would be so much simpler! But technical factors – external conditions affecting supply and demand – play a huge role too.
These include:
Inflation and Deflation
Low inflation historically correlates with high valuation multiples, while high inflation drives multiples down. Deflation is generally bad for stocks because it signals companies losing pricing power.
Market and Peer Performance
Stocks tend to move with both the broader market and their sector peers. Some research suggests that overall market and sector movements account for a whopping 90% of an individual stock’s movement! This explains why when one retail stock tanks on bad news, other retail stocks often follow – even without company-specific problems.
Investment Alternatives
Companies compete for investment dollars with other asset classes globally, including:
- Corporate bonds
- Government bonds
- Commodities
- Real estate
- Foreign equities
When these alternatives look more attractive, money flows out of stocks.
Incidental Transactions
Some stock buys or sells aren’t based on belief in the stock’s value but other factors:
- Executive insider transactions (often pre-scheduled)
- Institutional hedging activities
These still impact supply/demand and move prices.
Demographics
Research shows demographics matter! The proportion of middle-aged investors (who tend to invest in stocks) versus older investors (who often withdraw for retirement) affects overall demand for equities.
Market Trends and Momentum
Stocks sometimes develop short-term trends where:
- Rising stocks gather momentum as “success breeds success”
- Or they do the opposite, “reverting to the mean”
Unfortunately, trends are more obvious in hindsight than they are predictable.
Liquidity Factors
Liquidity – how much investor interest a stock attracts – is crucial. Walmart’s stock, being highly liquid, responds quickly to news. Small-cap companies often suffer from “liquidity discount” because they’re simply not on investors’ radar.
Market Sentiment: The Psychology of Investing
This is perhaps the most unpredictable factor. Market sentiment refers to the psychology of market participants, both individually and collectively.
Market sentiment is often:
- Subjective
- Biased
- Stubborn
You might make a solid judgment about a stock’s future, and eventually be proven right, but in the meantime, the market might fixate on a single piece of news that keeps the price artificially high or low.
Behavioral Finance Insights
The field of behavioral finance explores how psychology affects markets. Some key insights include:
- Investors overemphasize data that comes easily to mind
- People feel greater pain from losses than pleasure from equivalent gains
- Investors tend to persist in mistakes rather than admit error
These psychological patterns can create market inefficiencies that last for surprisingly long periods.
News: The Unpredictable Catalyst
While difficult to quantify, news and unexpected developments have undeniable impact on stock prices:
- Company earnings reports
- Product breakthroughs
- Mergers and acquisitions
- Political developments
- Global economic news
Since markets are interconnected globally, news in one country can instantly impact investors in another.
Different Investors, Different Focus
Depending on their investment horizon, different market participants focus on different factors:
| Investor Type | Primary Focus | Secondary Considerations |
|---|---|---|
| Short-term traders | Technical factors | Market sentiment |
| Long-term investors | Fundamentals | Technical trends, sentiment |
| Value investors | Undervalued fundamentals | Long-term growth potential |
| Growth investors | Future earnings potential | Current valuation metrics |
So Who Really Decides?
The truth is, no single entity or person controls stock prices. Instead, it’s the collective actions of:
- Individual investors
- Institutional investors (mutual funds, pension funds)
- Hedge funds
- Algorithmic trading systems
- Market makers
- Company insiders
- Government regulations and policies
All these participants respond to and interpret the fundamental, technical, and sentiment factors we’ve discussed.
My Personal Takeaway
After years of watching markets, I’ve realized that in the short term, stock prices can be driven by anything from a tweet to a rumor. But over the long term, fundamentals generally win out.
As Warren Buffett famously said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Tips for Navigating Stock Movements
Based on understanding who and what moves stocks, here are some practical tips:
- For short-term trading: Pay attention to technical indicators and sentiment
- For long-term investing: Focus on fundamentals while being aware of technical trends
- For peace of mind: Remember that market sentiment can drive prices away from fundamentals temporarily, but gravity eventually brings prices back to reality
- For decision-making: Stay informed about behavioral finance to understand market inefficiencies
Bottom Line
Different investors focus on different factors when analyzing stock prices. Short-term traders emphasize technical factors, while long-term investors prioritize fundamentals, although they may consider technical trends and market sentiment.
Market sentiment can influence prices in the short run, even with sound fundamentals, highlighting the unpredictability inherent in investing. Staying informed about behavioral finance can help explain these market inefficiencies.
The most balanced approach recognizes the impact of technical factors and sentiment while trusting that fundamentals generally shape stock values over the long term.
Remember, no single person or entity decides if a stock goes up or down – it’s the combined effect of millions of decisions made by market participants responding to fundamental factors, technical indicators, and their own psychological biases.
So next time someone asks “who decides if a stock goes up or down?” – you’ll know the complete answer!
How do stock prices work?
It starts with the initial public offering (IPO). Companies work with investment bankers to set a primary market price when a company goes public. The price is set based on valuation and demand from institutional investors.
After the initial offering, the stock starts to trade on secondary markets — that is, stock exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq. This is where we get into the market being a voting machine.
For highly traded stocks, there are buyers and sellers on each side constantly bidding and asking for new prices. Institutions trying to build huge positions and even brokerages working for retail investors will bid for stocks. If there are more buyers than sellers, the price will get bid up. If there are more sellers than buyers, the opposite will happen.
Thats why Graham called the market a voting machine. On a second-by-second basis, the stocks price reflects what current buyers are willing to pay and what current sellers are willing to take. This might sound familiar if you took economics in college. Its the same principle for any commodity: The price is determined by supply and demand.
Stock prices could determine whether you retire in comfort or you’ll need to keep working for a few years. Here’s how they work.By
- Stock prices fluctuate based on supply and demand influenced by investor actions and sentiment.
- Long-term value is dictated by a companys earnings, impacting stock prices as markets assess true value.
- P/E ratio is used to assess if a stock is priced fairly compared to historical earnings data.
Value investing pioneer Benjamin Graham once said that the stock market is a voting machine in the short run but a weighing machine in the long run. Once a company goes public on the stock market and its shares start trading on an exchange, the share price is determined by supply and demand.
Over the long term, share prices are determined by the economics of the business. Its impossible to predict exactly what a stock will do and when, but we can study how share price movement works. Lets unpack Grahams statement a little more and go over how stock prices work.
Why Stock Prices Go Up and Down, Explained With Tilray
FAQ
Who decides when stocks go up and down?
Share prices are determined by supply and demand. If demand from buyers is greater than supply from sellers, the price goes up. But if the opposite is true, the price goes down. The stock price is determined by the last price a buyer and seller agreed on.
What determines if a stock will go up or down?
If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.
Who actually controls the stock market?
What controls if a stock goes up or down?
Stock prices are determined by the basic economic principle of supply and demand, influenced by a wide range of factors including company performance, economic conditions, and investor sentiment. When demand for a stock is high relative to supply, the price goes up, and when supply exceeds demand, the price goes down. Key factors driving this include company earnings reports, industry trends, overall economic health, interest rates, inflation, and investor psychology.