EARNINGS reported four times a year, once each quarterP/E RATIO = price per share ÷ earnings per shareMARKET CAP = shares outstanding × price per shareSUPPLY & DEMAND more buyers than sellers pushes price upNEWS EVENTS corporate, industry, and world news move prices dailyTHE FED Federal Reserve statements on growth and inflation move marketsSESSION 11 What Causes Stock Prices to Change?
A stock's price is what investors believe a company is worth right now, plus what they expect it to be worth later. This session looks at the forces, earnings, news, and outside events, that push that belief up or down.
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Background
Minute to Minute, Quarter to Quarter
The price of a stock reflects a company's current value, but it also reflects investors' expectations of future growth and earnings. Prices move minute to minute for one basic reason: supply and demand. If more people want to buy a stock than sell it, the price goes up. If more people want to sell than buy, the price falls.
Layered on top of supply and demand are news events. Reports on internal corporate activity, industry trends, and national or international events get interpreted by the public as either "good" or "bad" news, and that interpretation shapes whether people see a company as a good investment.
Earnings drive the fundamentals. Public companies report earnings four times a year. Analysts build expectations around those reports; if actual results beat expectations, the stock price tends to rise, and if they fall short, the price tends to fall. Ratios like the P/E ratio help investors compare a stock's price to what the company is actually earning.
This session focuses on outside influences, current events, rather than the more technical or quantitative forms of stock analysis. It's the broadest and most accessible lens on why prices move.
Key Terms
Vocabulary
Tap a card to flip it and reveal the definition.
Earnings
Whatever profit or net income remains after subtracting a company's expenses from its revenue. Also called a company's profit.
Market Capitalization
The value of a company, calculated by multiplying shares outstanding by the current price per share. 100 million shares at $25 = $2.5 billion market cap.
P/E Ratio
A company's price divided by its latest annual earnings per share. It describes the relationship between a company's earnings and its share price.
Supply and Demand
The balance of buyers and sellers for a stock. More buyers than sellers pushes the price up; more sellers than buyers pushes it down.
What You'll Be Able To Do
Objectives
Analyze and interpret market indices that influence changes in the overall stock market.
Discuss the various ways stock prices are influenced.
Evaluate how investors can be affected by changing market prices when choosing to buy, sell, or hold.
Interpret charts and graphs to better understand the growth and change in stock prices.
Warm-Up
Springboard Activity
Before the main activities, ask yourself whether these headlines are real:
"Avocado shortage fuels crime wave in New Zealand" (New Zealand) bit.ly/1OonGus
"Avocados and the Mexican Drug Cartels" (US) bit.ly/2iZJy1r
"About 1000 avocados stolen from Renmark" (Australia) bit.ly/2iNm5kt
RealAll three are real. They point to the same underlying story: rising global demand running into a squeezed supply, which pushed avocado prices up sharply and created enough incentive for theft and illicit trafficking to follow the money.
Consider Calavo Growers (CVGW), an international farm products company. Avocados are only part of what Calavo sells. Do these headlines make investing in a company like Calavo look more or less attractive, and do they make you want to look at industries you hadn't considered before? That's an open discussion question, worth talking through before you read the Fact Sheet below.
Activity Sheet 1
The Ripple Effect
Pick a stock, bond, or mutual fund from your own portfolio (real or a practice one). Find three current news articles about events that could impact its price, then answer the five questions below for each article.
Example set used to build this session: a prior version of this activity was modeled on avocado-market coverage. The five source articles were:
The article traces how a decades-long surge in avocado demand, mostly driven by the United States, ran into repeated supply shocks (California's drought, a 2016 Mexican export stoppage, weather disruptions in Australia and New Zealand). It argues that the resulting price spikes had real side effects: illegal deforestation in Mexico to plant more avocado trees, water and pesticide strain on local communities, and a rise in avocado theft and cartel involvement tied to the crop's high value.
This is a brief summary, not a substitute for the article. All figures in it are from 2016 and should be treated as historical rather than current.
Discuss: has this article changed how you'd answer the springboard questions above? Stocks are influenced by many current events, not just a company's own earnings reports, and this session is about building the habit of tracing that chain of influence.
Activity Sheet 2 · Assessment
Influences on the Market
Four scenarios below. Work through each set of questions, then reveal the model reasoning to compare. These are discussion questions: reasonable answers can differ, so the reveal shows one defensible line of reasoning, not a single correct answer.
1. Toys for Everyone
The largest toy company in the United States, with stores in nearly every country and fifty years of fast growth. In the fall of 2004, its CEO was accused of embezzling twenty-five million dollars from the company, and the company is now under investigation.
A
How will this affect the earnings of the company?
DiscussionLegal fees for the investigation and any court proceedings cut directly into earnings, and that hit lands before there's any proof of wrongdoing.
B
How will the event affect the future of the company?
DiscussionA toy brand depends heavily on parents trusting it as safe and reputable. A scandal at the top, even one unrelated to product safety, can push some parents toward a competitor without a scandal attached to its name.
C
How do you think the event will affect the price of the company's stock?
DiscussionBad headlines tend to push the stock down in the short term, and if sales actually decline or the scandal widens, that pressure continues.
D
If the CEO is convicted, how do you think this will influence the stock?
DiscussionA conviction confirms the worst case, and the stock would likely stay depressed for longer, since the company is now permanently associated with the criminal case in the public's mind.
E
If the CEO is cleared, how do you think this will influence the stock?
DiscussionClearing the charges likely helps the stock recover, but probably not all the way back immediately. Some investors stay cautious simply because the association with the case lingers.
F
While the company is under investigation, how does that affect the stock?
DiscussionUncertainty itself is a negative for a stock price, since markets tend to price in the worse of two unresolved outcomes until there's clarity, so expect the price to drop and stay volatile until the investigation concludes.
G
Would you invest in this company? Explain.
DiscussionA risk-tolerant investor might buy after the drop, betting the CEO is cleared and the stock recovers, especially for a well-established company. A risk-averse investor would more likely sell and wait for clarity. Both are defensible; this is a personal risk-tolerance call, not a math problem.
2. Good Health Pharmaceuticals
A 20-year-old company developed a drug that can cure lung cancer and requested FDA approval to release it. The FDA reviewed the request and denied release, asking for further testing that could take up to ten years.
A
How will this affect the earnings of the company?
DiscussionEarnings take a hit, since the company has to fund years of additional testing without being able to sell the one drug it built its case around.
B
How will it affect the future of the company?
DiscussionPainful short term, but not necessarily fatal long term. If the drug is eventually approved, the ten-year delay could still end in a strong payoff.
C
How do you think it will affect the price of the company's stock?
DiscussionExpect the stock to drop and stay low, likely until the drug clears approval or the company brings another product to market.
D
How will the denial affect the company's stock specifically?
DiscussionThe denial removes the near-term catalyst investors were pricing in, so the immediate reaction is a sharp drop.
E
If the drug had been approved instead, how would that have affected the stock?
DiscussionApproval of a lung cancer cure would likely send the stock sharply higher, assuming the drug proves popular and no serious side effects emerge over time.
F
Would you invest in this company? Explain.
DiscussionGiven the high risk and the long, uncertain timeline to possible approval, a cautious investor would likely stay out. A high-risk investor betting on the science might see the depressed price as an entry point. Either is defensible depending on risk tolerance.
3. Good House Builders
A 14-year-old construction company in Mississippi. A hurricane destroyed homes and businesses across the southern part of the state, and Good House Builders is the only construction company in the area as people return to rebuild.
A
How will the hurricane affect the cost of materials that go into producing new homes? Explain why.
DiscussionPrices likely rise. Damaged roads and ports make it more expensive to bring materials into the region, and a surge in demand meeting the same or a reduced supply pushes prices up further.
B
How will the event affect the manufacturing of homes?
DiscussionHeavy pressure to build as many homes as quickly as possible, which could mean new factories, more supply stores, and expanded capacity.
C
How will the event affect consumers' interest in buying homes from this builder?
DiscussionDemand jumps because it's the only builder in the area. That's a monopoly position for as long as it lasts.
D
How will this event most likely affect the earnings of the company?
DiscussionRevenue climbs with the surge in demand, though expenses also rise with more workers, equipment, and materials, so the net earnings gain, while real, is smaller than the revenue gain alone.
E
How will the event most likely affect the future of the company?
DiscussionThe company likely grows larger and more profitable, at least while it holds its temporary monopoly on rebuilding in the region.
F
How do you think the event will affect the price of the company's stock?
DiscussionThe stock price likely rises as investors see the profit potential in the rebuilding demand.
G
If the hurricane hadn't hit, what other ways might the stock have been affected?
DiscussionWithout the disaster-driven surge, growth would likely have tracked ordinary population growth in the area instead, a real but much slower climb in stock price.
H
Would you invest in this company? Explain.
DiscussionThe near-term profit case is strong given the effective local monopoly. A longer-term investor would also want to know what happens to demand once the rebuilding phase ends.
4. Ford Motor Company
Inflation is at an all-time high, and the Federal Reserve raises interest rates in response. At the same time, Ford runs a major sale on cars and trucks, most of which people buy on credit, and the company worries about how the interest rate hike will affect its business.
A
How will the event affect consumers' interest in buying cars and trucks?
DiscussionHigher interest rates make financing more expensive, so demand for cars bought on credit likely drops even with the sale in place.
B
How will this affect the earnings of the company?
DiscussionAs sales decrease, earnings decrease with them.
C
How will it affect the future of the company?
DiscussionA real challenge to grow earnings while rates stay elevated. The company may need to find creative financing or new markets to offset it.
D
How do you think it will affect the price of the company's stock?
DiscussionIf investors see sales and profits declining, they tend to sell, which pushes the stock price down.
E
How will the interest rate affect the company directly?
DiscussionBeyond hurting car sales, higher rates also raise the company's own cost of borrowing, for example to fund new car development or open new showrooms.
F
Does the company have reason to worry about its business?
DiscussionYes. Both sides of the business, sales and borrowing costs, are pressured at once by the same rate hike.
G
How might the company avoid trouble with its business?
DiscussionOptions include offering lower-rate financing to buyers directly, trimming production on the least profitable models, or expanding sales into markets where rates or costs are lower.
H
Would you invest in Ford? Explain.
DiscussionGiven the double pressure on sales and borrowing costs, a cautious investor would likely wait for signs that inflation and rates are cooling before buying in.
Math Behind the Market · Thinking Algebraically
Calculating P/E Ratios
The P/E ratio is a share's current price divided by the company's earnings per share: P/E = Price ÷ EPS. Five of the eight source answers below check out exactly; three needed a correction.
Q1
EPS is $1.75, current share price is $14.50. What is the P/E ratio?
Verified14.50 ÷ 1.75 = 8.29. Matches the source answer key.
Q2
EPS is $0.80, current share price is $40.95. What is the P/E ratio?
Verified40.95 ÷ 0.80 = 51.19. Matches the source answer key.
Q3
A stock trades at $53.28, EPS is $1.39. What is the P/E ratio?
Verified53.28 ÷ 1.39 = 38.33. Matches the source answer key.
Q4
EPS is $2.01, stock is valued at $21.70. What is the P/E ratio?
Corrected21.70 ÷ 2.01 = 10.80 (10.796, rounded). The source answer key states 10.48, which does not reproduce: 2.01 × 10.48 = 21.06, not 21.70.
Q5
A stock trades at $38.42, P/E ratio is 25.69. What are its earnings per share?
A company has a P/E ratio of 17.51 and a stock value of $42.80. What are its earnings per share?
Corrected42.80 ÷ 17.51 = $2.44 EPS (2.4443, rounded). The source answer key states $2.42; checked against the formula, 17.51 × 2.42 = 42.38, not 42.80.
Q7
EPS is $2.04, P/E ratio is 29.55. What is the value of the company's stock?
Verified2.04 × 29.55 = $60.28. Matches the source answer key.
Q8
The P/E ratio of a stock is 1.49 and its EPS is $1.17. How much would it cost to buy 550 shares?
CorrectedPrice per share = 1.49 × 1.17 = $1.7433. For 550 shares: 1.7433 × 550 = $958.82 (rounded from $958.815). The source answer key states $957.00; that figure does not reproduce from the stated formula.
Math Behind the Market · Interpreting Statistics
Shocks to the Stock Market: Hurricane Katrina
Hurricane Katrina struck the Gulf Coast in late August 2005. The source material includes a line graph tracking two industries over June through December 2005: companies in the lumber business, and residential insurance companies.
Q1
Which trend line, dotted or solid, belongs to lumber businesses, and which to residential insurance companies? Why?
DiscussionLumber businesses would be expected to see gains after the storm, since rebuilding drives demand for materials. Residential insurance companies would be expected to see losses, since a wave of claims from destroyed homes hits their payouts hard. Whichever line drops sharply right after Katrina and stays low is the insurance line; whichever line holds up or climbs is the lumber line.
Q2
Both sectors began to recover from the initial shock. Where does the source material say that recovery shows up?
From sourceThe recovery is described as beginning at the end of October and continuing through November 2005.
Q3
What is another example of an industry that would have experienced great losses after Hurricane Katrina?
DiscussionAnswers will vary. Reasonable candidates include other insurance lines, regional tourism, and local farming or fishing operations concentrated in the affected area.
Q4
What is an example of an industry that would have experienced gains after Hurricane Katrina?
DiscussionAnswers will vary. Reasonable candidates include any industry that supplies, builds, or delivers building materials.
Math Behind the Market · Communicating Quantitative Information
Looking at the Effect of World Events
The source material includes a graph of the Dow Jones Industrial Average from January 2000 to April 2007, ranging roughly from $6,000 to $13,000. This is historical, pre-2007 data used as a teaching example, not a current market read.
~$10,700
~$8,900
~$7,600
~$11,700
~$12,500
Jan 2000
2001 dip
2002-03 low
2004-06 climb
Apr 2007
Q1
Terrorists attacked the United States in September 2001. What happened to the market?
From sourceThe market went down slightly in the immediate aftermath, but finished the year strong.
Q2
President Bush was reelected in November 2004. What happened to the market?
From sourceThe Dow increased after the reelection.
Q3
The Euro was introduced in January 2002. What happened to the market?
From sourceThe Dow dipped slightly but increased through February and March following the Euro's introduction.
Q4
The AOL and Time Warner merger was approved in February 2001. What happened to the market?
From sourceThe Dow dropped after the merger was approved.
Find another dramatic rise or drop on the graph and research what was happening in financial and world news at that time. This part is open research; there's no fixed answer to reveal.
Math Behind the Market · Tackling Complex Problems
Looking to the Federal Reserve
Investors watch Federal Reserve announcements closely. If the Fed signals the economy is doing well, or that inflation is under control, the market tends to rally. The three statements below are fictional, written for this activity, not real Fed language.
1
"Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over the coming quarters." Summarize, then predict the market's reaction.
DiscussionThe statement signals firmer growth and a stabilizing housing market, both read as good news. Expect the market to react positively.
2
"Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures." Summarize, then predict the market's reaction.
DiscussionMixed signal: some improvement, but a real caveat about sustained inflation pressure. Markets tend to dislike uncertainty, so a muted or slightly negative reaction is more likely than a clear rally.
3
"The Committee judges that some further policy firming may yet be needed to address inflation risks." Summarize, then predict the market's reaction.
DiscussionThis signals the Fed may keep raising rates, which reads as unresolved inflation risk. Markets tend to read this as not-yet-good news.
4
After a Fed announcement, the market dropped 0.064%. If a major market index was previously at $11,230, what would you predict the index value to be after the announcement?
FlaggedTaking the question literally, a 0.064% drop means: 11,230 × 0.00064 = 7.19 drop, so the new value is $11,222.81.
The source answer key gets $11,158 by instead treating the drop as 0.64%, ten times larger than what the question states: 11,230 × 0.0064 = $71.87 drop, giving 11,230 − 71.87 = $11,158.13. The question's stated "0.064%" and the key's used 0.64% don't match; both calculations are shown so either can be used depending on which figure is correct.
5
An announcement caused a major index to jump from $12,843 to $13,006. How big was this jump as a percentage?
Verified(13,006 − 12,843) ÷ 12,843 × 100 = 163 ÷ 12,843 × 100 = 1.27%. Matches the source answer key's result (its written formula has the subtraction backwards, but the final 1.27% is correct).