What Makes a Stock Go Up? A Guide for Beginners
Written by
John Csiszar
Edited by
Nupur Gambhir, CFHC™
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Stock prices move based on supply and demand — when more people want to buy a stock than sell it, the price goes up. When more people want to sell than buy, the price goes down. But what drives those buying and selling decisions is where it gets interesting.
How Does Supply and Demand Affect Stock Prices?
A stock is an ownership share in a company. When investors trade shares, buyers post the prices they’re willing to pay and sellers post the prices they’ll accept — this is known as the bid-ask spread.
When demand from buyers exceeds the available supply from sellers, prices rise to match the next level sellers are willing to accept. Here’s a simple example of how that plays out:
- Investor A offers $10.00 to buy
- Investor B offers $10.10 to buy
- Investor C offers $10.20 to buy
- Investor D asks $10.10 to sell, trade occurs with Investor B
- Investor E asks $10.20 to sell, trade occurs with Investor C
Each trade happens at a higher price because demand keeps pushing buyers to meet sellers at higher levels.
Your Bid Matters More Than You Think
- Use a limit order instead of a market order when buying — a market order fills at whatever the current ask price is, which can be higher than expected in a fast-moving stock
- The bid-ask spread widens on less liquid stocks, meaning you pay more to get in and give up more when you sell
- Check average daily trading volume before buying — higher volume generally means tighter spreads and easier exits
How Do Company Earnings Affect a Stock’s Price?
Over the long term, earnings are one of the biggest drivers of stock prices. Here are the two most important metrics to understand:
- Earnings Per Share (EPS). This measures how much profit a company generates for each share of stock. Companies with consistently growing earnings tend to attract more investors — and higher valuations. A company growing earnings at 17-20% per year, for example, will typically command a much higher stock price than one with flat or declining earnings.
- Price-to-Earnings Ratio (P/E). The P/E ratio is a stock’s price divided by its earnings per share. A lower P/E ratio compared to similar companies can signal that a stock is undervalued and potentially a better buy. That said, a very low P/E can sometimes indicate a struggling company, so it’s important to look at the full picture rather than one number alone.
How Does Market Sentiment Affect Stock Prices?
Even when the underlying fundamentals of a company are strong, short-term emotions can move prices significantly. A few common drivers:
- Rumors. Even unverified information can trigger buying or selling as investors try to get ahead of the crowd.
- Corporate news. Announcements like product delays, leadership changes, or missed earnings targets can shake investor confidence quickly, sending a stock lower.
- Analyst reports. When analysts upgrade or downgrade a stock, prices often follow. Analysts are assumed to have deeper information than the average investor, so their opinions carry weight.
Don’t Let a Headline Make Your Sell Decision
Before reacting to negative news, ask whether the company’s actual earnings potential has changed — or whether investor emotion is driving the dip. Check whether analysts have revised their price targets after the initial reaction, since early downgrades sometimes get walked back within days. A stock that drops on rumor and recovers when the facts come out is a signal that sentiment, not fundamentals, was doing the work.
How Do Economic Conditions Affect Stock Prices?
Broader economic forces can lift or drag down stock prices across entire industries or the whole market.
- Inflation. High inflation raises the cost of doing business, which squeezes corporate profits and tends to push stock prices lower.
- Interest rates. Higher interest rates — which often accompany inflation — make borrowing more expensive for companies and make bonds more attractive to investors relative to stocks.
- GDP growth. When the overall economy is expanding, many companies grow with it. Strong GDP data tends to boost investor confidence and increase demand for stocks.
- Industry trends. If several major companies in a sector report strong earnings, investors often buy into other companies in the same space, expecting similar results.
What Is Momentum Investing?
Sometimes stocks go up simply because they’ve been going up — and this creates a self-reinforcing cycle. Momentum investing is a strategy where investors buy stocks that are rising and sell those that are falling, betting that trends will continue.
This approach can be volatile since it amounts to timing the market. Tools like stop-loss orders — which automatically sell a stock when it drops to a set price — can help manage the downside risk.
Set Your Stop-Loss Before Emotion Takes Over
Decide your exit point before you buy, not after the stock starts falling. A common approach is setting a stop-loss 10-15% below your purchase price, though the right threshold depends on how volatile the stock typically is. The goal isn’t to avoid all losses — it’s to take the decision out of your hands in the moment when panic is most likely to lead to a worse outcome.
How Do Insider Activity and Institutional Investments Move Stock Prices?
- Insider buying. When senior executives like a CEO or CFO buy shares of their own company with personal funds, many investors take it as a bullish signal. These insiders arguably have the best understanding of the company’s prospects.
- Institutional activity. Large institutions trade in significant volumes, which can directly influence prices. Because institutions must publicly report their holdings, some investors track and mimic their moves — which can amplify the price impact even further.
How Do Stock Buybacks and Dividends Boost Share Prices?
- Stock buybacks. When a company uses its profits to buy back its own shares and retire them, the total supply of available shares shrinks. With less supply and the same demand, prices — and earnings per share — tend to rise.
- Dividends. Regular cash payments to shareholders attract long-term investors who are less likely to sell their shares quickly. This reduces selling pressure on the stock and can support a steady upward trend over time.
How Do Global Events Affect Stock Prices?
External events can override fundamentals entirely, at least in the short term.
- Fear and panic. Events like the 9/11 attacks or the COVID-19 pandemic triggered broad market selloffs regardless of company valuations or earnings. Wars, severe weather events, and sudden regulatory changes can all drive prices down quickly.
- Optimism. In periods of widespread confidence, stocks can trade well above traditional valuations as investors pile in expecting continued growth.
The key thing to remember is that many external shocks are temporary. When a stock drops due to broader market fear rather than any change in the company’s fundamentals, it can create a genuine buying opportunity for long-term investors.
What’s the Best Way To Navigate Stock Volatility?
No single factor fully predicts where a stock is headed — prices get pushed and pulled by earnings, sentiment, macroeconomic data, global events, and more, often all at the same time. The most reliable way to manage that uncertainty is through diversification. Owning a mix of stocks across different industries and asset classes helps smooth out the volatility and reduces the risk of any single event derailing your portfolio.
This article is for informational purposes only and does not constitute financial advice.
FAQ
Here are the answers to some of the most frequently asked questions about stock prices and fluctuations.- What causes a stock price to drop suddenly?
- Sudden drops are usually triggered by unexpected bad news — a missed earnings report, a leadership change, a product failure, or a broader market event like a spike in interest rates or a geopolitical shock. Even strong companies can see sharp short-term drops when sentiment turns quickly.
- Is a low P/E ratio always a good sign?
- Not necessarily. A low P/E can mean a stock is undervalued and worth a closer look, but it can also reflect genuine problems — slowing growth, shrinking margins, or a business in structural decline. Always look at why the P/E is low before assuming it's a bargain.
- How do interest rate changes affect stock prices?
- When rates rise, borrowing becomes more expensive for companies, which can compress profits and slow growth. Higher rates also make bonds more attractive relative to stocks, pulling some investors out of equities. The effect is usually felt most sharply in growth stocks, which are valued on future earnings that get discounted more heavily in a high-rate environment.
- What is a stop-loss order and how does it work?
- A stop-loss is an instruction to automatically sell a stock if it falls to a specific price. It's a way of capping your downside without having to monitor your portfolio constantly. For example, if you buy a stock at $50 and set a stop-loss at $42, the position sells automatically if the price hits that level.
- Should I follow what institutional investors are buying?
- Institutional moves are worth paying attention to, but not blindly copying. Large institutions have different time horizons, tax situations, and risk tolerances than individual investors. That said, significant institutional buying in a stock — especially by multiple funds — can be a useful signal that sophisticated investors see value there.
- Are stock buybacks good for investors?
- Generally yes, though it depends on the price the company pays. When a company buys back shares at a fair or undervalued price, it reduces the share count, which boosts earnings per share and can push the stock price higher. If a company overpays for its own stock, the benefit is diminished.
- How long do market downturns from global events typically last?
- It varies widely. Some event-driven selloffs — like the initial COVID crash in early 2020 — recovered within months. Others, like the 2008 financial crisis, took years to fully unwind. The key distinction is whether the event caused lasting economic damage or was primarily a confidence shock. Confidence shocks tend to resolve faster once clarity returns.
Daria Uhlig contributed to the reporting for this article.
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