What Causes Stocks to Go Up and Down?

Every day the stock market is open there is a battle going on between buyers and sellers. Every buy order generates demand which lifts the price of a given stock while every sell order does the opposite putting pressure on the given price of a stock. Although there are other factors that come into play like the number of shares on the open market and things like short squeezes, volume, VWAPs, etc., for the most part price action is based on a mechanism of buying and selling. If more shares get aggressively bought price tends to go up, if more shares get aggressively sold prices tends to go down. With all this being said, the question still remains why? Investors want to generate a return in the long term, this is why stocks get bought, with the expectation of future profits. Investors also want to avoid losses or protect profits, this is one of the main reasons they might sell a given stock.

Expectations

Price action is rooted in expectations. Since markets are forward looking, nearly everything in the market is guided by estimates and future expectations. Companies with higher expectations for profits and growth will always be looked at more favorably than those without it. However, if expectations are already firmly rooted into the price of a stock, this might not mean that a stock will automatically have price appreciation, especially during quarterly earnings reports. For most stocks (there are many exceptions, stock prices also change based on news and other announcements), prices appreciate most when expectations are surpassed. In some scenarios, stock price can actually go down even if estimates are beaten simply due to the fact that expectations are simply too high.

Dividends & Share Buybacks

Many years ago, stocks prices used to move in tangent with dividends and used to be a factor of dividend growth. The concept is the same today except in most scenarios’ dividend growth has been replaced with reinvestments back in Research and Development or a share buyback program. In some scenarios many investors would prefer a share buyback program as opposed to a large dividend since the buyback is more impactful to appreciation of the share price. Today, stocks are more focused around share price then dividend payouts, even though many good dividend stocks still exist and excel in today’s market, the ones with a high yield tend to have too large of a tradeoff between share price and dividend. Dividends can sometimes cause increased selling and therefore stock prices to decrease, and for many long-term investors this is why a share buyback program is more preferential.

Buyers vs. Sellers

So yes, if your favorite stock went up in price today, odds are there were more buyers than sellers. However, that doesn’t always paint the full picture. Short squeezes cause an increase in price, as do expectations of positive earnings reports. This is why many times stocks run up weeks before earnings reports are released. There isn’t always an underlying reason for price increases or decreases and underlying sentiment has ebbs and flows but expectations tend to play a big part in price action, if not the biggest.