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Stocks · 03 / 13
Stock basicsLevel 2Products8 minUpdated

Why do share prices move?

A share price doesn't tell you what the company has done. It tells you what the market expects it to do, and changing expectations move the price.

What you'll learn
  • How the price is formed between buyers and sellers
  • Why the price reacts to expectations rather than to reported figures
  • Why good news can push the share price down

The price is the last completed trade

On the exchange, nobody sets the price. It is formed when a buyer and a seller agree on the same number. So a stock's share price is the price of the last completed trade, not an estimate of the company's true value.

When more people want to buy than sell, buyers have to raise their bids and the price goes up. When there are more sellers, the opposite happens.

Expectations are already in the price

Here is the hardest idea in stock investing to take on board: the price contains the market's current expectations about the company's future.

If everyone knows the company is growing fast, that is in the price. The share price doesn't rise because growth happens as expected. It rises if growth is better than expected. The price reacts to the gap between expectation and outcome, not to the outcome as such.

Chart · illustrative example
Why a record result pushed the share price down
The price reacts to the gap between expectation and outcome, not to the outcome as such.
Market expectation
+22%
This figure was already in the share price before the announcement.
Actual growth
+18%
The best result in the company's history, but below expectations.
Share price reaction on the day of the announcement−6%

The same logic works in the other direction: a company posting weak results can rise sharply if the result was less weak than feared. The share price reaction measures the surprise, not the performance.

What changes expectations?

Company-specific information
An earnings release, a change in guidance, a new product, a change of management or a competitor's move.
Industry
A change in demand, raw material prices, regulation or technological disruption.
Interest rates
Interest rates affect what future earnings are worth today. Rising rates typically weigh on valuations.
General market sentiment
Appetite for risk varies. It moves share prices even without any company-specific reason.
Liquidity
In a thinly traded stock, a single large order can move the price noticeably.
Index changes
Being added to or removed from an index causes mechanical buying and selling pressure.

What does this mean for an investor?

  • Daily movement isn't information about the company's quality. Most of it is fine-tuning of expectations and sentiment.
  • The direction of the news doesn't tell you the share price reaction. What matters is whether the news was better or worse than what was priced in.
  • In the short term, price and value can diverge for a long time. Over the long term, the company's performance weighs more.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

Check question
Test yourself: price formation
Pick an answer to see the explanation right away.
Kysymys 1 / 2
A company publishes a record result and the share falls. What is the most likely explanation?
Kysymys 2 / 2
What does a stock's share price tell you?
Score: 0 / 2

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