Why do share prices go up and down?
Share prices move every second of every trading day, and most of the movement looks like noise. Behind the noise is one simple principle. A share price is whatever the last buyer and seller agreed on, and both sides are constantly changing their minds about what a slice of a company is worth. Understanding why they change their minds is the difference between feeling seasick when you look at your portfolio and feeling in control.
The textbook answer is that a share is worth the present value of all the money the company will return to shareholders in the future. In plain English, that means two things. How much the company is going to earn. And how much a pound of future earnings is worth to investors today. When either of those changes, the share price changes. Everything else is elaboration on that single idea.
Company news is the most obvious driver. A supermarket chain reports that sales grew faster than expected. Its share price rises because investors now think future profits will be a little higher. An oil company announces a platform shutdown. The price falls because future profits just got a little lower. Every scheduled earnings announcement is a moment where the market recalibrates its estimate, and every unexpected update in between is a smaller version of the same thing. This is why share prices move most on the days companies speak.
Interest rates are the other big lever, and this one surprises people. When the Bank of England raises rates, safe savings accounts pay more. That makes the future cash flows from shares relatively less attractive, because you can now get a decent return without taking any risk. Investors respond by accepting a lower price for shares. When rates fall, the opposite happens. This is why you will often see the UK stock market move the moment the Bank of England announces a rate decision, even before any company has said a word.
Sentiment matters more than most textbooks admit. Markets are made of humans, and humans get scared and greedy in waves. A piece of bad macroeconomic news, a war, a banking scare, or a political surprise can send prices falling even when individual companies have reported nothing new. The underlying earnings did not change. The mood did. This is the uncomfortable truth that explains why the FTSE 100 can drop two percent on a day when absolutely nothing material has happened.
Supply and demand also play their part in ways that get ignored. When a large pension fund decides to rotate out of UK equities into bonds, it has to sell large blocks of shares, and those sales alone can push prices down for a few days. When a popular stock gets added to a major index like the FTSE 100, tracker funds have to buy it, and the buying alone pushes it up. Both effects are mechanical. They have nothing to do with the company’s future and everything to do with who needs to trade today.
A concrete UK example. In October 2022 the then Chancellor delivered a budget that the bond market hated. Gilt yields jumped, sterling dropped, and within hours the FTSE 250, which is more exposed to the UK economy than the FTSE 100, was sharply lower. Individual housebuilders fell more than ten percent in a day. None of them had issued a profit warning that morning. The market had simply decided that rising mortgage rates would mean fewer houses sold, and rewrote every housebuilder’s future in real time. Three days later, after a partial reversal, most of those prices recovered most of their ground.
A common misconception is that a falling share price means the company is worse than it was yesterday. Sometimes that is true. Often it is not. The company is the same company. What changed is what other investors are willing to pay for it today, given the latest news, the latest interest rate, and the latest mood. That is why the phrase Mr Market, popularised by Benjamin Graham, is still the best frame. Mr Market is a moody business partner who quotes you a different price every day. You do not have to accept his quote. You only need to when you want to buy or sell.
Valuation ratios are another part of the picture worth understanding. The price to earnings ratio, or P/E, compares a company’s share price to its annual earnings per share, and gives you a rough sense of how much investors are paying for each pound of profit. A high P/E can mean the market expects fast growth or it can mean the shares are expensive. A low P/E can mean the shares are cheap or it can mean the market expects trouble. On its own the number tells you little. Compared to the company’s history, its peers, and the wider market, it starts to tell a story.
It is also worth understanding the role of market makers and algorithmic traders. On any given day, most of the volume on the London Stock Exchange is driven not by long term investors deciding what to buy but by computer programs constantly buying and selling to profit from tiny differences in price. This activity is what makes markets liquid, meaning you can always get a price when you want one. It also means that small, short term price movements are often the footprint of machines rather than a signal that anything meaningful has happened. Ignoring these micro moves is the easiest win in investing.
The practical takeaway is this. Short term share price movements are noisy, driven by a mixture of news, rates, sentiment, and flows, and they tell you very little about the long term value of a business. The right instinct is to care about what the company earns and what you paid for it, and to ignore most of what the ticker is doing on any given Tuesday. If you can train yourself to do that, you will make better decisions and sleep much better at night. Both of those pay dividends, in every sense of the word.
This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.