What makes market move

Much of it concerns these two dynamics:. The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples. Often a stock simply moves according to a short-term trend.

On the one hand, a stock that is moving up can gather momentum , as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean.

Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future. Liquidity is an important and sometimes under-appreciated factor. It refers to how much interest from investors a specific stock attracts. Wal-Mart's stock, for example, is highly liquid and thus highly responsive to material news ; the average small-cap company is less so.

Trading volume is not only a proxy for liquidity, but it is also a function of corporate communications that is, the degree to which the company is getting attention from the investor community.

Large-cap stocks have high liquidity—they are well followed and heavily transacted. Many small-cap stocks suffer from an almost permanent "liquidity discount" because they simply are not on investors' radar screens. While it is hard to quantify the impact of news or unexpected developments inside a company, industry, or the global economy, you can't argue that it does influence investor sentiment.

The political situation, negotiations between countries or companies, product breakthroughs, mergers and acquisitions, and other unforeseen events can impact stocks and the stock market. Since securities trading happens across the world and markets and economies are interconnected, news in one country can impact investors in another, almost instantly.

News related to a specific company, such as the release of a company's earnings report, can also influence the price of a stock particularly if the company is posting after a bad quarter. In general, strong earnings generally result in the stock price moving up and vice versa. But some companies that are not making that much money still have a rocketing stock price. This rising price reflects investor expectations that the company will be profitable in the future.

However, regardless of the stock price, there are no guarantees that a company will fulfill investors' current expectations of becoming a high-earning company in the future. Market sentiment refers to the psychology of market participants, individually and collectively.

This is perhaps the most vexing category. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a stock's future growth prospects, and the future may even confirm your projections, but in the meantime, the market may myopically dwell on a single piece of news that keeps the stock artificially high or low.

And you can sometimes wait a long time in the hope that other investors will notice the fundamentals. Market sentiment is being explored by the relatively new field of behavioral finance. It starts with the assumption that markets are apparently not efficient much of the time, and this inefficiency can be explained by psychology and other social science disciplines.

The idea of applying social science to finance was fully legitimized when Daniel Kahneman , Ph. Many of the ideas in behavioral finance confirm observable suspicions: that investors tend to overemphasize data that come easily to mind; that many investors react with greater pain to losses than with pleasure to equivalent gains; and that investors tend to persist in a mistake.

Some investors claim to be able to capitalize on the theory of behavioral finance. For the majority, however, the field is new enough to serve as the "catch-all" category, where everything we cannot explain is deposited. Different types of investors depend on different factors. Short-term investors and traders tend to incorporate and may even prioritize technical factors. Long-term investors prioritize fundamentals and recognize that technical factors play an important role.

Investors who believe strongly in fundamentals can reconcile themselves to technical forces with the following popular argument: technical factors and market sentiment often overwhelm the short run , but fundamentals will set the stock price in the long-run.

In the meantime, we can expect more exciting developments in the area of behavioral finance, especially since traditional financial theories cannot seem to explain everything that happens in the market. Harvard Business School. Accessed March 7, National Bureau of Economics Research. Association for Psychology Science. American Psychological Association. Risk Management.

Tools for Fundamental Analysis. Fixed Income Essentials. Your Privacy Rights. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise are better than expected , the price jumps up. If a company's results disappoint are worse than expected , then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock which, in turn, changes its price. It would be a rather simple world if this were the case! During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most all Internet companies saw their values shrink to a fraction of their highs.

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. Importantly, looking to firms with superior margins and better balance sheets will become more prominent as this recovering profit cycle ages.

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