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Why stock prices rise and fall

A stock rises when buy orders accept higher prices than before. The root cause is usually a change in expected cash flows, perceived risk, or market-demanded returns.

3 min read Practical guide

By the end

You will be able to interpret a rise or fall without reducing it to "there are more buyers than sellers."

Results versus expectations

The market discounts a future. Revenue, margins and guidance move the price when they change that future relative to prior expectations. A positive surprise may raise estimates; a good result that still misses consensus can trigger selling.

Example

A company expected to grow 20% and it grows 12%. It continues to grow, but it is worth less if the price incorporated that 20%.

Earnings, valuation multiples and interest rates

Price = expected economic result × multiple that the market agrees to pay. The price can rise because profit increases, because the multiple widens, or both. High rates often reduce the present value of distant benefits and make less risky alternatives more attractive.

Separates profit change and multiple change.

Check if the surprise affects a quarter or the entire thesis.

Compare valuation with your own history and with alternatives.

Flows, liquidity and positioning

In the short term, index rebalancing, hedging, forced sales and low liquidity also influence. They can temporarily move price and value away, but they do not automatically turn a decline into an opportunity. The question is whether the fundamentals remain and there is a margin of safety.

A framework to explain movements

First describe what changed: sales, margin, balance sheet, regulation or cost of capital. Then estimate how much the future benefit or risk changes. Finally, check what the price discounted. If you cannot connect news and evaluation, recognize that the cause is not proven.

From data to a decision

Does the news improve expectations?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Results or guidance beat what was priced in and raise future cash flow.

Adverse reading

The figure is good but misses consensus or requires more risk.

Required confirmation

Separate the estimate change from the multiple change.

Reasoned example

EPS rises from 4 to 5, but P/E falls from 30 to 20: theoretical price falls from 120 to 100 despite growth.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

1Reconstruct prior expectations from consensus, guidance and the previous valuation.
2Split the surprise into revenue, margin, cash and outlook; do not stop at headline earnings.
3Break the price move into earnings revisions and multiple expansion or contraction.
4Check whether the reaction changes the multi-year thesis or only short-term positioning.

Review questions

Was the result good, or better than expected?
Did future cash flow change, or only sentiment?
Does the new valuation require a harder scenario to achieve?

Worked case

The same news, two reactions

Company A increases sales 15% when 8% was expected and raises guidance: expected profits and price increase. Company B increases 15%, but the consensus was 25% and reduces margin: it may fall even if the headline seems identical.

Build a bridge: previous estimate → new data → revised estimate → multiple. This way you avoid explaining each movement with a news item chosen later.

Decision rule

Don't just ask if the result is good; It asks what was discounted and how much it changes the future flow or its risk.

Put it into practice

Choose a drop after results and separate it into three columns: actual data, prior expectation and probable effect on profit or multiple.