Have you ever wondered how stock prices move? Or why does a company’s stock plunge even after performing well?
It’s Mr Market and his little elves (partly joking, partly serious).
Stock prices move because of one core principle: supply and demand. But beneath this simple idea lies a complex ecosystem of factors.
So, what are the rational and emotional forces that influence stock prices?
The Core Principle: Supply & Demand
Every price movement in the stock market can ultimately be traced back to supply and demand.
More buyers (demand) than sellers (supply)? Stock prices rise.
When there are limited sellers of, say, Mastercard’s stock, buyers will bid higher and higher prices to get existing Mastercard shareholders to sell to them.
More sellers (supply) than buyers (demand)? Stock prices fall.
The opposite is true. When there are more sellers of stock, the price will fall until buyers deem them cheap enough to warrant a buy.
The factors influencing supply and demand vary widely. Though they include microeconomic and macroeconomic factors, corporate events, and market sentiment, you’ll see that emotion is the root cause of most, if not all, buying and selling.
Company-Specific (Microeconomic) Factors
These are internal events or developments directly related to the company itself.
Earnings Reports
Quarterly earnings give shareholders an update on company performance. They present a company’s revenue, profits, and other key performance indicators over a period and how they match up against analyst expectations.
If a company beats expectations, its stock may soar. However, if it misses, the stock might tumble (even if the reported results are strong).
Forward Guidance
Financial markets are forward-looking, and so are investors. That’s why a company’s guidance – its projections for the coming quarters and year – is influential.
If a company misses analyst expectations but management gives strong guidance, its stock can rise. On the contrary, if a company beats expectations but provides weak guidance, the stock may decline.
Forward guidance can also amplify stock price movements.
Beating analyst expectations and strong guidance can push a stock up 15% instead of, let’s say, 10%. On the other hand, missing expectations and weak guidance can intensify a price decline.
Mergers & Acquisitions (M&A)
M&A deals can spark investor optimism about future growth or concerns about debt, dilution and business integration.
The acquiring company’s stock often trades down on acquisition announcements. This occurs mainly due to shareholder disagreement on factors like:
- Dilution: Issuing new shares to fund the deal.
- Purchase Price: Shareholders not aligning with it.
- Leverage: Taking on too much debt to fund the deal.
- Integration: If the acquiree doesn’t improve the existing business.
The acquiree’s stock usually rises due to the takeover premium (most companies are purchased for more than their stock trades in the market).
Leadership Change
A new CEO with a strong track record of success can boost investor confidence and a company’s stock price.
On the contrary, poor appointments, high leadership turnover and uncertainty around key roles can hurt a stock.
Market-Wide (Macroeconomic) Factors
These are broad economic influences that affect nearly all stocks.
Interest Rates
Central banks (like the Bank of England) set benchmark interest rates in their respective economies. These influence the cost of borrowing (the interest rates on loans), consumer spending, business investment and company valuation.
Higher interest rates squeeze consumer spending and reduce business investment. Lower revenues from lower consumer spending and lower growth from reduced business investment can hamper company performance and cause stock prices to fall.
Inflation
Rising inflation increases business costs and reduces consumer purchasing power. Together, these two spell trouble for businesses. If revenues and profits stagnate or decline, the stock may tumble.
To fight rising inflation, central banks raise interest rates. The impacts of higher rates were discussed above.
Geopolitical Events
Because of the world’s interconnectedness, any geopolitical event can create uncertainty, and if there’s one thing investors dislike…it’s uncertainty.
Wars, trade wars and global pandemics all negatively impact stock prices.
Market Psychology & Investor Sentiment
Stock prices don’t always move based on logic. In the short term, emotion often drives price action.
Fear & Greed
These are the two most dominant emotions in financial markets. Fear causes panic selling, and extreme fear pushes prices to unusual lows. Extreme greed often leads to unusually high prices and overvaluation.
Fear and greed are so prominent in markets that there’s even a tracker for them. You can check it out here.
Speculation & Hype
Sometimes, stocks rise simply because people believe others will keep buying, regardless of price and business fundamentals.
The GameStop saga, fuelled by a Reddit group, is a recent example. Since 2019, the company’s revenues have been declining, and it reported losses in each year except 2024 and 2025. Nevertheless, its stock price, detached from its fundamentals completely, rose from $1 to $80 (an increase of 8,025%) in 6 months (July 2020 to January 2021).
The party ended shortly after, and the price returned to reality, down over 70% since then.
Media & Analyst Influence
A single headline or analyst upgrade from a big bank can trigger buying and selling sprees.
Investors often react emotionally to market news before checking the facts. Nothing can change about a company’s fundamentals, but if investors’ perceptions do, they will be quickly reflected in the stock price.
Events That Commonly Move Stock Prices
While ongoing fundamentals and economic trends shape a stock’s trajectory, certain events can trigger buying and selling pressure, often altering a stock’s perceived value.
Stock Splits
Stock splits occur when companies reduce the price of their shares by ‘splitting’ them.
If a company has 1,000 shares in circulation, each trading for £1,000 and announces a 4-to-1 stock split:
- Its share count will increase to 4,000 (1,000 x 4)
- Its share price will fall to £250 (£1,000 ÷ 4)
- Existing shareholders will now have 4x more shares than they had before
While stock splits don’t affect a company’s fundamentals*, they can influence psychological perception and fuel buying. £250 is much more accessible than £1,000.
*Stock splits don’t affect a company’s fundamentals because the company is still worth the same, pre-split and post-split:
- Pre-split: Company value = £1,000,000 (1,000 shares x £1,000)
- Post-split: Company value = £1,000,000 (4,000 shares x £250)
Stock Buybacks
When a company repurchases its shares, it can signal confidence from management that the stock is undervalued. When investors catch wind of this, they’ll buy, too, fuelling more buying pressure.
Dividend Announcements
Dividends are cash distributions from a company’s accumulated profits to shareholders.
When companies, especially high-quality ones, initiate a dividend, this can push prices higher as investors buy in to benefit. Announcing an increase in dividend payments has a similar but smaller influence on investor buying.
On the other hand, cutting or suspending a dividend can signal financial distress. This may result in excessive selling and a drastically lower stock price.
Rounding It All Up!
Stock prices change because of supply and demand. When there are more buyers than sellers, stock prices rise. Conversely, more selling pressure causes prices to fall.
The factors determining supply (investor selling) and demand (investor buying) in markets range from earnings reports and interest rates to market sentiment, investor emotions and corporate events.
By understanding what moves stock prices, you can:
- Stay calm during market volatility.
- Better evaluate opportunities and risks.
- Make more informed investment decisions.
The more you know, the better!
