If stock prices moved purely based on how good or bad a company was, investing would be easy. You’d just find great businesses and watch their prices steadily rise. But that’s not how markets behave — and anyone who’s watched a stock fall after “great news” has already seen the flaw in that logic.
A stock’s price doesn’t move because of what happened. It moves because of what changed.
At the most basic level, stock prices move because of buying and selling. If more people want to buy a stock than sell it, the price goes up. If more people want to sell than buy, the price goes down. That sounds obvious — but it hides the real driver underneath.
Why do people suddenly want to buy or sell?
Because their expectations changed.
The market is constantly trying to price the future. Every stock price represents a rough consensus about what investors believe a company will earn, grow into, or risk over time. When new information arrives — earnings, guidance, interest rates, regulations, competition — the market updates that consensus.
The price moves to reflect the new story.
This is why a company can report record profits and still see its stock drop. If investors were expecting even more, the disappointment matters more than the absolute result. On the flip side, a struggling company can rally on “bad” news that wasn’t as bad as feared.
Prices respond to surprise, not to headlines.
There’s also a mechanical side most beginners don’t see.
Stock prices are set at the margin. That means the next buyer and the next seller determine the price — not long-term investors quietly holding shares. If a large institution decides to sell, or if short-term traders rush in, the price can move sharply even if nothing about the company’s fundamentals changed that day.
This is why stocks can swing wildly on low news days. Liquidity, positioning, and emotion matter in the short run far more than spreadsheets do.
Over longer periods, fundamentals start to matter more.
Revenue growth, profits, competitive advantages, and balance sheets all influence whether a stock can sustain higher prices. But even here, the key question isn’t “Is the company good?” It’s “Is the company doing better or worse than what the market already expected?”
That difference is where gains — and losses — come from.
For beginners, this leads to an important shift in thinking.
Instead of asking:
-
“Is this a good company?”
Start asking: -
“What does the market already believe about this company?”
A “great” company with unrealistic expectations can be a terrible investment. An average company with low expectations can be a surprisingly good one.
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