Why does stock price move?

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Stocks rise when buyers are more aggressive than sellers. They fall when sellers are more aggressive than buyers. Most investors mistakenly believe that stocks rise when there are more buyers than sellers. The difference is significant and it has far-reaching implications. Liquid markets always have an excess of both buyers and sellers who generate bid and ask prices. A transaction occurs when the high bid and low ask come together; either the bid is raised or the ask is lowered. A rising bid represents aggressive buying and a falling ask represents aggressive selling. Aggressive buying drives up the transaction price while aggressive selling lowers it.

Buyers and sellers can become aggressive for many different reasons. Triggers can include news about the economy, other stocks, or individual industries. Money can also flow in or out of other markets as interest rates rise and fall and currency exchange rates fluctuate. News surprise also cause investors to shift money between stocks in the same sector. Investors make these choices thousands of times each day. Simply stated, money that flow into the stock market does not evenly into all stocks.

It is also important to understand the underlying forces that cause investors to become aggressive buyers and sellers of a stock or other financial instrument. The dynamics are simple. At any time, the market sets a price that comprehends everything that can be known about a particular stock including confidential information known only to insiders. The moment new information becomes available, market forces adjust the price.

Every stock trades at a characteristic price/earning (PE) ratio. The market bids up the price of a stock when it anticipates that earnings will rise sharply. A high PE, therefore, is the market's way of predicting future growth and pricing that growth into a stock. Analysts raise  their "price target" for a particular stock, when their forward-looking view reveals that earnings will rise faster than previously forecast. If the market completely agreed with new forecast, the price would immediately rise to equal the new predicted value. The difference between a stock's trading price and an analyst's future price target  is important because it represents the difference between two views. The market votes with real money and analysts vote with words on paper. Sometimes the gap reverses because information surfaces that causes the market to become more bullish on a stock than existing forecasts. The more optimistic view will drive the price above targets already set by the analyst community. If the situation persists, analysts will raise their forecasts.

Unfortunately, investors often misinterpret the meaning of price targets set by the analyst community. The common belief is that stocks experience steady growth, and that they are always on a trajectory to reach future price. In reality, there is no trajectory. The price will remain flat if company continues to perform as predicted by the market.