When starting out on a trading and investing journey, everything seems mystifying. For one thing, the language used is different, but probably the most perplexing thing for newcomers is that stocks often seem to move for no reason. The same stock will go up one day and down the next, sometimes in dramatic fashion, and no two moves seem to be about the same thing.
However, stocks don’t move without a reason, and those reasons can be broken down into two distinct categories: the impact of changes in the broad economic situation that influence all stocks, known as macro influences; and changes relevant to just one security, or micro influences.
Macro
It makes sense that markets are moved by economic conditions: If the economy is suffering and people and businesses are spending less, this obviously results in less profit for companies. Profits are the basis of a company’s worth and therefore the price of its stock. That is why economic data, such as the monthly jobs report, Gross Domestic Product (GDP), which is the measure of the overall size of the economy, and inflation numbers both for producers (PPI) and consumers (CPI) have such a big influence.
However, it isn’t quite that simple.
Those things are informative, but they look back at what happened over the last month or quarter, and stock traders are in many ways more interested in what the future holds than what happened in the past. When they buy or sell a stock, it is in anticipation that the price will go up or down, and that will be determined by what happens next, not what happened before.
That is why interest rates are so important. Lower rates encourage borrowing and investment, which increase the chances of more economic activity and therefore greater profits for companies in coming months, while higher rates squeeze the economy, discouraging investment and leaving companies and individuals with less spending money after servicing their debt, suggesting a reduction in profits is coming.
These things all influence the market as a whole, as usually measured by the three major stock indexes: the Dow Jones Industrial Index, the Nasdaq 100, and the S&P 500. Each of those indexes represents the value of a basket of stocks. The Dow is comprised of only 40 stocks with, as its name implies, a bias towards industrial names; the Nasdaq is made up of 100 stocks, with more of a futuristic bent, representing sectors like technology and biotech; while the S&P reflects the fortunes of 500 of the biggest stocks, making it wider ranging, with both industrial and tech names included.
As we all know all too well, though, individual stocks within those indexes have lives of their own, sometimes moving in the opposite direction from the market as a whole. Those moves are caused by things that affect that individual company’s prospects rather than those for the economy as a whole, which leads us to the other reason why stocks move.
Micro
Individual stocks move based primarily on the profits and prospects for each company. The most obvious source of information that impacts those things is each company’s quarterly earnings report. Public companies are required to detail their performance each quarter, showing their total revenue and profits. Again, though, that looks backwards rather than forwards, so while important, past earnings can often be less influential than what a company says in its earnings report about how they see the future.
They are not required to give a forecast of future profits, known as guidance, but many do, and history shows that their guidance, rather than past revenue and profit, is the main driver of price changes after an earnings report. Even those that don’t offer guidance have commentary from management that accompanies earnings, and the tone of that commentary will often have more of an impact on price than the results. A company may have made a lot of money last quarter, but if they see business dropping off, the stock will go down despite that good quarterly performance.
In the same vein, news reports and announcements that impact a company will have an effect on its stock. News of a big new contract, a takeover bid, or changes to senior management, along with a host of other things, will often cause big moves in a stock, even if the market overall is relatively quiet.
Then there are less solid factual causes for movement; things like traders’ perception of a stock and sentiment around it, or technical factors based on a reading of the chart that suggest that a stock is about to go up or down, thus encouraging buying or selling.
Final Thoughts
As you can see, there are a lot of things that influence a stock’s price, ranging from big picture economic conditions to things that impact only the one company. What is important to remember, though, is that the quoted price of a stock represents only the last price at which a buyer and a seller were both happy to trade. That means that at any given time, one party believed that the stock was going up while the other believed it was going down. Maybe they were looking at different things, or operating on a different timescale, but for whatever reason, opinions differed.
That tells you that while all these influences on a stock matter, assessing their impact is not an exact science. Sometimes your analysis will prove right and sometimes wrong. The most important thing is to understand that, and to have a plan for each eventuality. Good luck!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.