What Makes a Stock Go Up? A Guide for Beginners

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Stock prices go up and down based on supply and demand. When people want to buy a stock versus sell it, the price goes up. If people want to sell a stock versus buy it, the price goes down.

Trying to forecast whether there will be more buyers or sellers of a certain stock over the short term is difficult, if not impossible. Over the long term, however, you’ll have a better chance of picking winning stocks if you do your research. Buyers are attracted to stocks for any number of reasons, from low valuation to new product lines to market hype.

Learning how the stock exchange works is the first step in understanding what makes a stock go up and down. You can better predict which ones are more likely to rise.

Supply and Demand in the Stock Market

A stock is an ownership share in a company. Stock shares allow investors to buy or sell an interest in a company on an exchange through a bidding process. Sellers indicate prices at which they are asking to give up their shares, and buyers similarly post prices at which they’re bidding to buy shares. This is known as the bid-ask spread.

Supply refers to the number of investors willing to sell their shares. Demand refers to the number of investors willing to buy shares. When more buyers are willing to pay the sellers’ asking price than what’s available, the stock price will go up to the next level at which sellers are asking. Here’s an example of how supply and demand work in the market:

Example of Supply and Demand

Buyers

1. Investor A offers $10 to buy a stock.
2. Investor B offers $10.10 to buy a stock.
3. Investor C offers $10.20 to buy a stock.

Sellers

1. Investor D asks $10.10 to sell the stock.
   • The first published trade occurs at $10.10, when Investor B buys from Investor D.
2. Investor E asks $10.20 to sell the stock.
   • This trade occurs when Investor C enters the market and pays $10.20.

This shows how investor demand can drive up the price of a stock. After the first trade at $10.10, no more sellers are willing to accept such a low price. The next trade occurs at $10.20, as the demand to pay a higher price exceeds the willingness of sellers to accept a lower price.

Company Performance and Fundamentals

Here’s a breakdown of the different ways you can gauge a stock’s value.

Earnings Per Share

Earnings per share are one of the most popular ways to evaluate the value of a stock. Stocks with higher earnings, particularly when they are consistently growing, are simply worth more.

Imagine, for example, that a company earns $5 per share in 2024 and is expected to earn $6 per share in 2025 and $7 per share in 2026. This represents an annual growth rate of roughly 17% to 20% per year. In most industries, this is a very high growth rate and investors tend to pay a premium for fast-growing stocks. 

Compare this with a second company that earns $2 in 2024 and is projected to earn just $1 in 2025 and $1.50 in 2026. All other things being equal, the valuation of the first company should greatly exceed that of the second company, as investors are more interested in companies with rising earnings and growing revenue. Positive earnings reports boost investor confidence.

P/E Ratio

The P/E ratio is another metric for comparison that investors use to value stocks. The P/E ratio simply consists of a stock price divided by its EPS. If Company A’s stock price is $50 and its EPS is $1, its P/E ratio is 50. If Company B’s stock price is $50 and its EPS is 50 cents, its P/E ratio is 100.

In other words, a company with a lower P/E than another within the same industry may be more attractive to investors, as it can be considered undervalued. However, as an investor, you should factor in all variables when valuing stocks, not just the P/E ratio. Some companies, for example, have very low P/E ratios because they are failing companies with missing earnings or losses. Buying stocks like these can be more of a speculation than an investment.

Market Sentiment and Investor Confidence

Although earnings drive stock prices over the long run, there’s no denying that over the short run, emotions can rule.

Rumors and Market Volatility

Rumors influence perception and can create market volatility as investors try to get in or out of positions before the masses.

Corporate News

However, actual corporate news can also influence investor confidence, pushing a stock up or down. If a company is expected to bring a new product to market in the second quarter of a given year but then announces that it won’t be ready until the fourth quarter, some investors might sell, either disappointed at the delay or concerned that the company can’t meet its deadlines.

Analyst Reports

Analyst upgrades or downgrades can also impact demand. As analysts are presumed to have access to more information than the average investor, when they publish reports or give interviews on CNBC, stocks tend to move. As with corporate news or even internet rumors, if investors start to lose confidence in a company, market sentiment can turn sour, and vice versa.

Industry Trends and Economic Factors

Any economic factors that can hurt corporate earnings can also reduce stock prices.

Inflation

Historically speaking, high inflation has tended to drive stock prices lower. This is because inflation causes higher prices, which makes it more expensive to run a business.

High Interest Rates

The same is true with higher interest rates, which often occur during times of high inflation. Larger, widespread events affect specific industries instead of the market overall, such as when a presidential administration slaps tariffs on particular goods or companies.

Gross Domestic Product

Gross domestic product can also play a role. If the economy as a whole is expanding, it means that many individual companies, which comprise an important portion of the nation’s GDP, are growing as well. This type of positive macroeconomic news can get more investors interested in picking up shares of stock.

Similarly, if an individual market sector is performing well, it can have a direct influence on other stocks in the same industry. If three major consumer goods companies report better-than-expected earnings, for example, investors are likely to buy shares of other companies in the industry as they expect them to outperform as well.

Momentum Investing

Sometimes, stocks go up simply because they have been going up. In a strategy known as momentum investing, investors buy shares in rising stocks and sell shares in those that are falling. This momentum builds on itself and continues to drive rising share prices higher. Also known as relative strength investing, this strategy follows market trends to select stocks rather than other traditional valuation metrics.

Investors try to identify trends early to increase the amount of time they can profit from the run-up and decrease the time it takes to sell stocks on the decline. This strategy can be rather volatile, as it amounts to timing the market. Tools such as stop-loss, which is an order to sell a stock when it drops to a certain price, can help offset some of the risks.

Innovation and Future Growth Potential

• New products or technologies attract investor interest
• Forward-looking growth statements signal opportunity

Insider Activity and Institutional Investments

When company insiders, such as senior management like the CEO and CFO, pick up company shares with their own money, it’s known as insider buying. Many investors consider this a bullish sign, as these corporate insiders should have the best understanding of anyone as to the company’s prospects.

Institutional activity in a stock can also affect its share price. Not only do institutions traffic in larger share counts, which could potentially drive prices, but they also have to report their investment in regular reports. Some investors try to mimic institutional share activity, so this can drive further price movements.

Stock Buybacks and Dividends

Two ways that companies can boost their share prices are through stock buybacks and dividends. In a stock buyback, a company will use some of its earnings to buy its own stock. Then, it will retire those shares, removing them from the available supply. With a reduced supply, share prices– and earnings per share — go up.

Stock dividends, in which cash is paid out to investors every quarter, attract long-term investors. This not only boosts demand for shares, but it also puts the stock in the hands of “strong holders,” meaning they are less likely to sell in the short term. This can reduce the selling pressure on a stock, contributing to its upward climb.

External Events and Global Factors

Sometimes, valuation, technical analysis and other factors don’t matter as much as global events.

Hard Times

In times of great fear or panic, such as after 9/11 or when COVID-19 became a global pandemic, markets tend to sell off, regardless of valuation or earnings. Everything from the outbreak of a war to severe weather events to regulatory changes that make it hard for a company to do business can drive a stock price down.

Optimistic Times

Similarly, in times of great optimism, stocks tend to trade up, even when considered overvalued by traditional standards. These events are termed exogenous events because they occur outside of the market or individual stocks themselves.

It’s Only Temporary

What’s worth noting, however, is that oftentimes these outside factors are only temporary. This can create a buying opportunity in shares of companies that have traded down in price without any long-term fundamental changes.

Final Take

One of the reasons why a stock can be volatile is that it has so many factors affecting it at one time. From corporate earnings to insider transactions to macroeconomic, geopolitical and other factors, stock prices can get pushed and pulled in several directions at once.

However, there can be an opportunity in this volatility. If a company’s share price sells off due to factors that don’t directly affect its operation, such as a passing round of fear in the overall market, it could prove to be a long-term buying opportunity.

The bottom line when it comes to investing is that although certain factors can help predict stock movements, the best approach is to have a diversified portfolio. Rather than putting all your eggs in one basket, owning several different stocks and investing in a variety of asset classes can help smooth out the ups and downs of your portfolio.

Daria Uhlig contributed to the reporting for this article.

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