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.
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.
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.
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.
FAQs on What Makes a Stock Go Up
Here are the answers to some of the most frequently asked questions about stock prices and fluctuations.- What causes a stock to go up the most?
- If more investors would rather buy a stock than sell it, its price will move up. It's a bit of a pithy statement, but the old Wall Street axiom that "more buyers than sellers" moves a stock the quickest, is true. Whether it's due to a strong upsurge in earnings, a new CEO, an analyst upgrade or even internet rumors, many factors ultimately affect a stock's price.
- Do earnings reports always impact prices?
- Earnings reports don't always impact stock prices, but earnings surprises typically do. If a company is expected to report earnings of $5 per share gain in a given quarter, but ends up with a $2 per share loss, investors will generally flee the stock.
- How do external events influence stock growth?
- All types of external factors can influence a stock's price. However, it's important to distinguish if these factors are only transitory or if they will have a long-term effect on a company's growth. If a company's only manufacturing plant gets wiped out in a hurricane, for example, this is a major challenge that could take a long time to resolve. If a company escapes unscathed and its share price drops just because investors are jittery about the storm, though, it may very well bounce back rapidly.
- What role do institutional investors play in price increases?
- As the market is a supply and demand mechanism, when there are a lot of shares being purchased at the same time, it can create stock price increases. As institutional investors, such as mutual funds, hedge funds and private foundations, tend to trade in much larger amounts than the average investor, they can move markets. However, knowing this could adversely affect their own purchases, most large institutions perform block trades or otherwise acquire shares in a way that won't cause too much market disruption.
Daria Uhlig contributed to the reporting for this article.