What moves stock prices?

Introduction: supply and demand

To understand what moves stock prices you need to know a little about markets. Stocks are traded on public markets, organised as exchanges. Like any market, in a stock exchange the actions of individual buyers and sellers determine prices. The role of the exchange is to provide fair and functional markets that match buyers and sellers at an agreed price for an agreed volume; that price moves naturally in response to large orders or large numbers of them. The amount of stock traded in a session or time period is known as the volume, and this level varies significantly, with the amount of volume the key determiner for market liquidity.

Liquidity is one of the most important concepts for new traders when they begin to learn how to trade stocks. In a highly liquid market, there is a sufficient volume of buyers and sellers to allow for large orders to take place without moving the market, but in smaller markets big trades will directly impact the price. The actions and ratio of buyers to sellers form part of price discovery, the process whereby the market reaches a suitable price for each asset. Nowadays, this process takes place using algorithms that group trades into blocks and execute them with a number of trading firms known as market makers, who are obliged to offer a buy and sell (bid and ask) price at all times. There are many factors that can push prices in one direction or another, creating the trends and reversals that traders use to profit.

What influences stock prices?

Stock prices move up and down, which is one reason why investors need to be careful when making equity investments. But price movements are not random, as investor decisions are driven by measurable factors such as economic conditions, the performance of the company behind the stock, and market trends. Because investors respond to the same conditions at the same time, noticeable patterns can form, known as trends. Trends can be either positive or negative in direction, with uptrends called bullish and downtrends bearish.

Equity markets are quite sensitive to the overall market environment and will often move together exhibiting correlation. An overall market environment which is positive for equities is referred to as ‘risk on’ or a bull market, and one which is bearish on stocks ‘risk off’. CFD traders are able to trade simply in either direction, as their positions do not involve ownership of the underlying stock. In a risk on environment, most equities will trend upwards, while the reverse is true in risk off. It is important to remember that individual stocks may not follow the overall trend, for example if a single company posts bad results during a general market uptrend. Stock volatility depends both on the individual stock being traded and the level of volatility in the broader market.

Economic conditions, market participants, and stock prices

We’ve just seen how stock prices can change in different market conditions, with risk on increasing equity prices and risk off depressing them, but what is responsible for these conditions? Markets exist to allocate risk, and to offer returns to investors willing to take on those risks. They are driven upwards by a desire for investment, the promise of good returns, and more capital becoming available to invest. Financial news and global economic performance are big drivers of these conditions, and when signals there are positive, equities will often see gains.

Conversely, markets decline when there is reason to cash in existing investments, returns are poor, and capital is hard to access. Due to their historically strong performance as long-term investments, equities are often favoured by investors with very long timescales such as pension funds and insurance companies. The main shareholders of most publicly traded equities are large investment management companies followed by these investors. These long-term, major investors prefer to ride out stock market movements, so a lot of the day-to-day volume on exchanges comes from more active traders. Active traders involve day traders and hedge funds who look to make returns on short term positions, often using technical analysis to identify and trade trends.

Technical analysis

Technical analysis of share price movements involves looking at past price action to predict future moves. For CFD equity traders, technical analysis is the most important method used to compare different stocks, as it is best suited to short-term trading based on market timing. Longer-term traders still use technical analysis to find the best entry points for their trades, but tend to make decisions based on fundamental analysis.

How to read stock charts

Learning how to read stock charts is an important skill in technical analysis. ADSS CFD traders can choose from many different chart types, including candlesticks, bar charts, and classic line charts. The different types all convey the same information, but some are more detailed than others. In particular, bar charts and candlestick charts are divided by time session, whereas line prices are continuous. Traders can superimpose other indicators such as Bollinger Bands or moving averages on top of their preferred chart type.

Some patterns only appear on candlestick charts, and there is a large subfield of technical analysis that deals exclusively with interpreting these patterns. Patterns are arranged into reversal and continuation patterns, often with bullish and bearish variants for each reversal type. Continuation patterns are signs that future sessions may continue in the same direction, while reversal ones indicate a change in market sentiment. You can learn more about common candlestick patterns on the ADSS Education section.

Combining technical and fundamental analysis

Mastering technical analysis is key to becoming a successful CFD trader, and technical factors are the most important things for a day trader to learn. This doesn’t just apply to equities, CFD forex traders in particular rely on technical analysis to form investment decision, but no-one should completely ignore fundamental analysis and underlying economic data. Fundamental analysts look at financial announcements such as Non-Farm payrolls, GDP figures, and unemployment to form an opinion on the outlook of a particular national economy (for forex trading) or company (equities). For asset classes such as index or commodity CFDs, a combination of the two is definitely necessary, with attention to the specifics of the underlying market.

Summary: predicting stock market movements

Each stock market movement has a cause, and the best traders can understand them. That doesn’t mean markets are ever totally predictable, with down and up moves both common and sometimes happening without warning, but a strong understand of what drives markets will help you to respond. Think rationally about how markets work: who takes part in them, what are their motivations, how are they likely to trade, and how does that impact overall conditions. Technical analysis is your most important tool for trading CFDs successfully, but it should be combined with general economic knowledge and an understanding of the bigger picture. Once you’ve got all that – you’ll be well on your way to trading success.

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