What makes a stock go up and down? Whenever a stock is bought, someone on the other side is selling. Professionals (institutions) and retail (part-time) investors make daily decisions to buy or sell stocks. It’s supply and demand. More buyers than sellers on a given day causes stock prices to go up.
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What makes a stock go up?
1. Rising profit (earnings) is a company’s most critical element. Without profits, a company will go out of business. Without profits, there is no economy. Jobs vanish, taxes are unpaid, and the government can’t function. Profit is company sales minus expenses.
2. Rising sales (revenue) over a year or three is a positive sign. Profits are key, but companies can adjust an income statement to make earnings slightly higher or lower. Sales numbers are difficult to manipulate. Sales are relative, however, and may be down one year if competitors in the same industry are also experiencing a decline.
3. With stocks, price and value are two separate concepts. When buying merchandise, consumers look for products on sale. When purchasing stocks, look for good value. Good stocks are often higher per share, but many lower-priced stocks can still be good values. The Price-to-Earnings (P/E) ratio is a guide and will be explored in a future post.
4. Growing dividends are a sign of a good company. Quarterly dividend payouts come from company earnings. Rising dividends are a positive sign for the stock price. Earnings can be adjusted. When a dividend is paid, it’s proof that a company is succeeding.
5. Low liabilities mean a company must pay relatively little to run a business. Too much debt can kill a good company, but so can simply spending more than it’s bringing in. Current expenses should be more than covered by current income.
6. Companies with a high entry barrier are often considered good investments, as they typically possess superior technology, effective marketing, patents, a dominant brand, or more cost-effective or faster production methods. If competitors have difficulty keeping up, a company has high barriers to entry.
7. Companies in growing markets with low political risk are generally considered good investments. Examine demographics and market data to determine which products are selling well. Politics is a two-edged sword that can help or ruin companies.
8. Stocks involved in a megatrend will typically perform well. Today’s megatrends include digital disruption and AI, a fragmenting world, a low-carbon transition, demographic divergence, and the future of finance.
What to do for Beginners?
Companies strive to achieve all these attributes, but the marketplace, economy, and demographics constantly change. Good companies evolve and adapt to ever-changing signals from consumers and business trends. Investing means staying informed about your stocks and adjusting your portfolio over time.
New to investing? These explanations may help:
• Understanding Earnings Season
• Risk Categories & Diversification
This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.