What Makes a Stock Price Go Up?

What affects stock price?

High demand for a stock drives the stock price higher, but what causes that high demand in the first place? It's all about how investors feel:

• Market sentiment toward the stock.
• Market sentiment toward the industry.
• Market sentiment toward the stock market.
• Confidence in the economy.

The more confident investors are about a company's prospects or the potential for positive developments, the more likely they are to want the stock. Conversely, a loss of confidence can lead investors to sell, pushing down the stock price.

Factors that can affect sentiment toward a stock include quarterly earnings reports beating or falling short of expectations, analyst upgrades or downgrades, and positive or negative business developments.

Demand for a stock can also be affected by sentiment toward a particular industry. An electric vehicle company, for example, may see its stock price soar as investors snap up shares because those investors are confident in the future of the EV industry. A rising tide can lift all boats.

This goes both ways. If investors sour on an industry, every stock in that industry could suffer -- regardless of how each individual company is doing.

Why do stock prices change every second?

Stock prices are driven up and down in the short term by supply and demand, and the supply-demand balance is driven by market sentiment. But investors don't change their opinions every second. So why, then, do stock prices change so fast?

The current stock price is nothing more than the price at which the last transaction took place. For many stocks, transactions are occurring every second the stock market is open.

Investors trade an average of 50 million shares of Apple (NASDAQ:AAPL) each day. Every time a block of shares is bought and sold, the stock price changes to reflect the latest transaction price. The sheer number of transactions ensures that the stock price fluctuates every second, even if there's been no change in market sentiment.

The big picture is what matters

Long-term investors, like those of us at The Motley Fool, don't much care about the short-term developments that push stock prices up and down each trading day. When you have years or even decades to let your money grow, analyst reports and earnings beats are often fleeting and irrelevant. What matters is where a company will be five, 10, or 20 years from now.

In the long term, the value of a stock is ultimately tied to the future cash flows generated by the company. Investors who believe a company will be able to increase its earnings in the long run or who believe a stock is undervalued may be willing to pay a higher price for the stock today, regardless of short-term developments. This creates a pool of demand undeterred by day-to-day news, which can push the stock price higher or prevent big declines.

While a lot of ink is spilled about daily fluctuations in stock prices, and while many people try to profit from those short-term moves, long-term investors should be laser-focused on a company's potential to increase its profits over many years. Ultimately, rising profits push stock prices higher.

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