Why do stock prices go up and down? Well, if a company's profits keep growing, its stock price will follow suit -- eventually. Corporate earnings drive stocks in the long run. In the short run, though, there are many different reasons stock prices flitter up and down. Some of these reasons matter and some don't. It does help, though, to understand the factors that can move a stock. Here are a few:
The company's latest earnings report -- Strong and growing profit margins may push a stock up (and vice versa), while rising debt or inventory may depress it.
New products or services -- Positive media coverage and strong market acceptance can prompt stock appreciation, while sluggish sales foreshadow depreciation.
Earnings report pre-announcements -- If a firm expects to underperform Wall Street's quarterly earnings estimates significantly, expect the stock to fall. If the firm hints of outperformance, expect a rise.
- News about the company's ongoing business operations -- Landing a monstrous new long-term contract bodes well for a company, as does news that its methodical global expansion is proceeding at a rate 15% ahead of plans.
Here are some other factors that move stocks; these are things that investors would usually do well to ignore:
- Gurus on television or in financial magazines speculating that a company might be bought out at a premium. (Because it might not.)
- Company insiders selling shares. (Because insider sales often simply represent an executive generating a little needed or wanted money.)
- Soothsayers divining future stock prices by looking at charts of price movements.
- Crowds of people snapping up shares of "hot" stocks without understanding the industries involved.
Remember also that stock prices often rise or drop on rumors or hype -- or for no reason at all. Perhaps a bird flapped its wings extra hard flying over the Zambezi River and that set off a domino-like chain of events, eventually leading to people buying more shares than usual of a stock this morning. (This is perhaps a rather remote possibility, but hey -- you never know.)
Sometimes stocks will also rise or drop just because other stocks in the same industry are rising or dropping. And, if most of the market is slumping or surging, it can take many stocks along for the ride.
Don't sweat small day-to-day moves. Focus on quarterly earnings performance and the growth of the business over the next few years. Short-term pricing on the stock market is generally irrational, but long-term values are driven by business growth.
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