Why do stock prices change following news reports?

By Investopedia Staff AAA
A:

Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular stock, its market price will increase. Conversely, if more people want to sell a stock, its price will fall. This relationship between supply and demand is tied into the type of news reports that are issued at any particular moment.

Negative news will normally cause individuals to sell stocks. Bad earnings reports, poor corporate governance, economic and political uncertainty, and unexpected, unfortunate occurrences will translate to selling pressure and a decrease in stock price.

Positive news will normally cause individuals to buy stocks. Good earnings reports, increased corporate governance, new products and acquisitions, as well as positive overall economic and political indicators, translate into buying pressure and an increase in stock price.

But it's difficult, if not impossible, to capitalize on news. The impact of new information on a stock depends on how unexpected the news is. This is because the market is always building future expectations into prices. For example, if a company comes out with better-than-expected profits, the stock's price will likely jump. But, if that same profit was expected by a majority of investors, the stock's price will likely remain the same as the profit would have already been factored into the stock price. Thus, it's unexpected news - and not just any news - that helps drive prices.

For further reading, see What Causes Prices to Change? and Trading On News Releases.

RELATED FAQS

  1. When do stock market exchanges close?

    Learn about stock exchanges, the main function of stock market changes and the opening and closing times of some major stock ...
  2. What are some examples of different taxable events?

    Learn what a taxable event is and how it affects investors and taxpayers with examples of taxable events that can result ...
  3. Why is the time value of money (TVM) an important concept to investors?

    Understand why the time value of money is an important concept for investors. Learn when present value and future value calculations ...
  4. What commodities are not tradable?

    Learn about some of the durable and consumable goods that are not considered tradable commodities and why these goods cannot ...
RELATED TERMS
  1. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  2. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  3. Paper Trade

    Using simulated trading to practice buying and selling securities ...
  4. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
  5. Bid And Asked

    A two-way price quotation that indicates the best price at which ...
  6. Compound Net Annual Rate - CNAR

    The return on an investment after taking tax implications into ...

You May Also Like

Related Articles
  1. Investing Basics

    Here's How To Tap International Markets

  2. Investing News

    Looking To Invest In U.S Start-Ups? ...

  3. Investing Basics

    How a Stock Buyback Works: MasterCard

  4. Trading Strategies

    Consider The Season On Trading Day

  5. Trading Strategies

    Harness Elliot Wave principles To Tap ...

Trading Center