What makes stocks go up

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Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Stock prices are determined in the marketplace, where seller supply meets buyer demand.

But have you ever wondered about what drives the stock market—that is, what factors affect a stock's price? Unfortunately, there is no clean equation that tells us exactly how the price of a stock will behave. That said, we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors, and market sentiment.

In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things:. An owner of common stock has a claim on earnings, and earnings per share EPS is the owner's return on their investment.

When you buy a stock, you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: It is the price you are willing to pay for the future stream of earnings.

Part of these earnings may be distributed as dividends , while the remainder will be retained by the company on your behalf for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base. Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow-based measures are superior.

The way earnings power is measured may also depend on the type of company being analyzed. Many industries have their own tailored metrics. Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.

The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are:. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple. What determines the discount rate?

First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which, in turn, earns a lower multiple. Second, it is a function of inflation or interest rates , arguably. Higher inflation earns a higher discount rate, which earns a lower multiple meaning the future earnings are going to be worth less in inflationary environments. In summary, the key fundamental factors are as follows:.

Things would be easier if only fundamental factors set stock prices. Technical factors are the mix of external conditions that alter the supply of and demand for a company's stock. Some of these indirectly affect fundamentals. For example, economic growth indirectly contributes to earnings growth. Technical factors include the following. We mentioned it earlier as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well.

Historically, low inflation has had a strong inverse correlation with valuations low inflation drives high multiples and high inflation drives low multiples. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell.

The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly. The important things to grasp about this subject are the following: At the most fundamental level, supply and demand in the market determine stock price. Price times the number of shares outstanding market capitalization is the value of a company. Comparing just the share price of two companies is meaningless. Theoretically earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price.

Remember, it is investors' sentiments, attitudes, and expectations that ultimately affect stock prices. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything. In spite of all the ways to evaluate stocks, the truth is that no one can say with absolute certainty when a stock will go up in value or down.

However, in the long run, the trend in the overall stock market is up. Your best bet when looking for stocks that will go up in price is to evaluate factors that tend to drive prices higher, including those described above:. You can also use these factors to help you know when to sell stocks as well.

The bottom line when it comes to investing is that although certain factors can help predict stock movements, the best approach is to have a diversified portfolio. Rather than putting all your eggs in one basket, owning a number of different stocks can help smooth out the ups and downs of your individual portfolio.

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About the Author John Csiszar. After earning a B. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. Check Out Our Free Newsletters! Subscribe Now. In Case You Missed It.

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