What Actually Makes Stock Prices Go Up and Down?

 

When people see the stock market rise or fall, it can seem almost random. One day the S&P 500 is climbing, and the next day it can suddenly drop. But stock prices aren't simply based on how well the economy is doing today. Investors are constantly making guesses about what will happen in the future. When expectations change, prices can change with them. One theme that we will go over several times is the fact that unless you are a day trader, you should approach the market with a forward-looking perspective. 

Supply and Demand

At its most basic level, the price of a stock is determined by buyers and sellers. When more investors are willing to buy at higher prices than sellers are willing to accept, the price rises. When investors become more willing to sell and buyers aren't willing to pay as much, the price falls. This sounds simple, but millions of investors, institutions, algorithms, and traders are making decisions at the same time. Just as an example, imagine a new pair on trendy sneakers for $100 comes onto the market, and it becomes a viral sensation overnight. However, because thousands of more people want the shoe, the price skyrockets to $300. In other words, the demand increased so much, that the price had to match it.

One of the strangest things about investing is you can have "good news" and the stock market can still fall, which sounds crazy to some people. The reason is that investors care about whether the news is better or worse than what they already expected. If investors expected a company to earn $10 billion and it earns $10.5 billion, that's good news—but perhaps the market expected $11 billion. Prices reflect expectations before the news even arrives. If you were to take one thing away from this article, it would be that expecations are what changes the stock market. Remember that.

Businesses ultimately need to make money, (obviously, right?) and their profits are one of the most important factors behind the value investors place on them. When corporate earnings grow, investors may become more optimistic about the future. When profits decline, the opposite can happen. This is one reason economic conditions matter to the stock market: a stronger economy can create opportunities for businesses to sell more products and generate greater profits. 

Interest rates are another major force behind market movements. When rates rise, borrowing becomes more expensive for businesses and consumers, while safer investments such as bonds can become relatively more attractive. This is why investors often recommend diversifying your portfolio: having bonds, index funds, and international stocks. Higher interest rates can also reduce what investors are willing to pay for future corporate earnings. When rates fall, some of those pressures and expectations can move in the completely opposite direction.

However, I like to think that investors aren't robots. When people become confident about the future, they might be willing to pay higher prices for investments. When fear takes over, investors may rush to sell because they are worried about losing money. Don't let this become you, by the way. This can create dramatic market movements even when the underlying businesses haven't suddenly changed. Something you might have to consider if you are very quick to sell when it is low, is investing automatically, or in other words, having payments already linked to your investment account to feed it every month. 

Modern financial markets react incredibly, incredibly quickly to new information. An unexpected inflation report, a single Federal Reserve announcement, geopolitical event, or major change in corporate earnings can cause investors to rethink expectations within minutes. And yes, this is relatively normal! The important thing is that the headline itself isn't magically changing the value of every company—it is changing what investors believe the future might look like. Remember, expectations are extremely important. 

As just a quick example:

Federal Reserve Cuts Interest Rates by 0.50% Because of Cooling Inflation

News: The central bank lowers the cost of borrowing money, which has numerous pros and cons.
Expectations: Investors expect lower borrowing costs to boost profits and make stocks more attractive than bonds.
Buying/Selling: Investors rush to buy shares of growth stocks and real estate, while getting rid of most fixed-income bonds.
Prices: As a result, stock market indexes go upward like crazy, while bond yields decline. 

The stock market and the economy are connected, don't get me wrong, but they aren't the same thing. A growing economy doesn't guarantee that stocks will rise, just as a weak economic period doesn't guarantee that stocks will fall. Investors might already have expected the good economic news, or they might believe that future growth will slow down. This is why looking at one economic statistic and immediately deciding that the market "should" go up or down is usually a huge oversimplification.

With so many factors influencing prices, predicting the market consistently is extraordinarily difficult. There are just so many things to consider! Think about it, even though professional investors have access to enormous amounts of information, sophisticated research, and teams of analysts, they still cannot know what tomorrow's market price will be. Even when someone correctly predicts one market movement, that doesn't mean they can consistently repeat it, over and over again. Remember, it is impossible to 'guess' the market, so understand that lower risk does mean consistency more often than not. I would recommend playing the long game.

Understanding why markets move doesn't mean you need to react to every movement. In fact, it can have the opposite effect.Honestly, for a young investor with decades ahead, the goal isn't to predict every short-term movement—it is to build a diversified strategy, stay disciplined, and understand what you actually own. I promise this philosophy shouldn't and will not turn you into a day trader, but it will make you a calmer and smarter investor, something I believe is invaluable.