Why share prices change, in plain words

What actually moves a share price?

A share price moves because of demand and supply. When more people want to buy at the current price than want to sell, the price tends to rise. When more want to sell than buy, it tends to fall.

A share price is not set by the company, by the exchange or by SEBI. It is the price of the latest trade between one buyer and one seller. If you are new to shares and exchanges, read stock market basics for beginners first, then come back here.

Every buyer and every seller places an order. An order says how many shares and at what price. The exchange keeps all the waiting orders in a list called the order book. On one side are the buy orders, called bids. On the other side are the sell orders, called asks (or offers).

A trade happens only when a buyer's price meets a seller's price. So the price can move for just two reasons:

• buyers become willing to pay more, or fewer people want to sell, so the price is pushed up;
• sellers become willing to accept less, or fewer people want to buy, so the price is pushed down.

Everything else on this page works through these two doors. News moves a price only when it changes what people do in the order book. To see how the two main order types interact with the book, read market order vs limit order.

How does company news move the price?

Company news changes what people think the business will earn in future. If the news makes future profits look larger or more certain, buyers tend to pay more. If it makes them look smaller or less certain, sellers tend to accept less.

When you own a share, you own a small part of the business and its future profits. So anything that changes the picture of those future profits can change what people will pay. Common types of company news are:

• Results. Listed companies in India publish their results every quarter, that is, every three months. Sales, costs and profit are compared with the same quarter last year and with what people expected. To learn to read them, see how to read quarterly results.
• Orders and contracts. If ABC Limited, our made-up mobile company, wins a large contract to run a network for a state, people may expect more income in the next few years.
• Management changes. A new chief executive, or a key person leaving, can change how confident people feel about the company's plans.
• Problems. A penalty, a fire at a plant, a legal case or a delay in a project can make the future look weaker.
• Payouts to shareholders. A dividend, bonus issue or share split changes what shareholders receive or how many shares exist. These are explained in dividend, bonus and split explained.

Listed companies must share important news through the stock exchanges, so every investor sees it at the same time. The announcements are free to read on the NSE and BSE websites.

How do the economy and world events move prices?

News about the wider economy can move many shares at once, because it changes the costs, sales or borrowing of many companies together. Examples are interest rates, inflation, the rupee and events in other countries' markets.

In general terms, here is how each can matter. The same news can affect two companies in opposite ways.

• Interest rates. The Reserve Bank of India (RBI) sets a key interest rate. When borrowing becomes costlier, companies with large loans pay more interest, and people may buy fewer things on loan. When borrowing becomes cheaper, the opposite pressure can appear.
• Inflation. Inflation means prices of goods and services rising over time. It can raise a company's costs. Some companies can pass higher costs on to customers, and some cannot.
• The rupee. If the rupee weakens against the US dollar, a company that buys parts from abroad pays more for them, while a company that sells abroad may earn more rupees for the same sale.
• Global markets. Large moves in markets in other countries, or big world events, can change the mood of investors everywhere, including foreign investors who buy and sell Indian shares.
• Sector news. A sector is a group of companies in the same line of business, such as telecom or food. A new rule for one sector, or a change in the price of a raw material it uses, can move all the companies in it together.

You will often see a single number, an index, used to show how the market as a whole moved. That idea is explained in Nifty and Sensex explained.

What part does crowd mood play?

Prices also move because of how people feel, not only because of facts. When many people feel hopeful together, they may pay more than usual. When many feel fearful together, they may sell for less than usual.

A share price is made by people, and people copy each other. If ABC Limited's price has risen for ten days in a row, some buyers arrive only because it has been rising. If it falls sharply, some sellers rush out only because others are rushing out. This copying can push a price further than the news alone would explain, in either direction.

Mood can also shift with no new fact at all, after a rumour in a chat group or a dramatic headline.

So a rising price is not proof that a company is doing well, and a falling price is not proof that it is doing badly. If you feel like buying or selling only because everyone else is, that is the crowd at work. Notice it, and ask for the reason. Prices can fall and stay low for a long time, so losses are always possible.

Why can good news still make a price fall?

Because the price already carries what people expected. If a company reports good results but people had expected even better, the news is a disappointment compared with the expectation, and the price can fall.

Before results come out, buyers and sellers have already traded on their guesses. If most people expected strong results, buyers have already paid prices that assume them. When the results arrive, the question in the market is not "Is this good?" but "Is this better or worse than we thought?"

Take a made-up food company, XYZ Foods. Last year it earned a profit of Rs 100 crore in the July to September quarter. People who follow the company expected about Rs 130 crore this year, a rise of 30 percent. The company reports Rs 120 crore. That is a rise of 20 percent, which sounds good. But it is Rs 10 crore short of what people expected. Some holders may decide the share is now worth less than they paid, and the price can drop.

The reverse also happens. A company can report a loss, and the price can rise, because people had feared a much larger loss. This is why you cannot judge a price move from a headline alone. You need to know what was expected.

What are price bands and circuit limits in India?

A price band is a limit, set by the exchange, on how far a share's price can move up or down in one day from the previous closing price. A market-wide circuit breaker is a pause in trading across the whole market when an index moves too much in one day.

Indian exchanges place many shares in a daily price band, such as 2, 5, 10 or 20 percent either way from the previous day's close. The exchange sets each band and can change it. Suppose ABC Limited closed yesterday at Rs 100 and has a 10 percent band. Today it can trade only between Rs 90 and Rs 110. If buyers are willing to pay more than Rs 110, trades still cannot happen above Rs 110. People call this "hitting the upper circuit". The lower limit is the "lower circuit".

Shares that also have futures and options trading on them usually do not have this fixed daily band. The exchanges use other controls for them instead, and those rules can change. Check the current rules on the NSE or BSE website.

There is also a market-wide circuit breaker. Under SEBI's framework, if the Nifty 50 or the Sensex moves by 10, 15 or 20 percent in a day, trading across the equity markets is halted for a set time, or for the rest of the day for the largest move. The length of the halt depends on the size of the move and the time of day.

A band slows a price down; it does not stop it. A share stuck at its lower circuit can fall again the next day.

A worked example: ABC Limited on results day

Here is one made-up day in ABC Limited's order book. Better-than-expected results make buyers raise their bids and sellers raise their asks, so the price climbs step by step until the two sides meet at new levels.

All the numbers below are invented to show the arithmetic. ABC Limited is not a real share.

Step 1: before the results. People expect ABC to report a quarterly profit of about Rs 200 crore. The order book looks like this:

The highest bid is Rs 99.50 and the lowest ask is Rs 100.00. The gap between them, 50 paise, is called the spread. The last trade was at Rs 100.

Step 2: the results arrive. ABC reports a profit of Rs 240 crore. That is Rs 40 crore above the Rs 200 crore expected, or 40 / 200 = 20 percent better than expected.

Step 3: sellers change their minds. Some sellers cancel their asks at Rs 100.00 and Rs 100.50, because they now think the share is worth more. Their new asks start at Rs 103.

Step 4: buyers change their minds. New buyers arrive. Some place bids at Rs 102. Others want the shares right away and buy everything offered at Rs 103, then at Rs 103.50, then at Rs 104.

Step 5: the new meeting point. An hour later, the highest bid is Rs 104.50 and the lowest ask is Rs 105. Trades are happening around Rs 105. The price has moved from Rs 100 to Rs 105, a rise of (105 minus 100) / 100 = 5 percent. It stays well inside a 10 percent band, which would stop trades above Rs 110.

Notice two things. The profit beat expectations by 20 percent, but the price rose only 5 percent, because price is a judgement about many future years, not just one quarter. And the move could just as easily have gone the other way on a different day, or reversed later. Nobody knows in advance.

Common mix-ups

Beginners often mix up a company's price with its quality, and news with price movement. These five corrections clear up most of it.

1. "A high share price means a big or strong company." No. A Rs 2,000 share is not better than a Rs 50 share. The price per share depends partly on how many shares the company has. A common measure of company size is price times number of shares, called market capitalisation.
2. "Good news always means the price rises." No. What matters is how the news compares with what people already expected, as the XYZ Foods example showed.
3. "The exchange or SEBI sets the price." No. Buyers and sellers set it through their orders. The exchange only matches orders and applies limits such as price bands.
4. "Upper circuit means the share will keep rising." No. It only means the price reached the day's limit. What happens the next day depends on fresh orders.
5. "If I understand why prices move, I can predict them." No. Knowing the causes helps you understand moves after they happen. It does not tell you the next move, and losses are always possible.

Check yourself

Try these three questions. The answers are right below each one.

1. The highest bid for a share is Rs 250 and the lowest ask is Rs 251. Has a trade happened at Rs 250.50?
   Answer: Not from these orders. A trade needs a buyer and a seller to agree. Right now the buyer offers Rs 250 and the seller wants Rs 251, so they have not met.
2. PQR Motors, a made-up company, closed at Rs 400 with a 5 percent band. What is the highest price it can trade at today?
   Answer: 5 percent of Rs 400 is Rs 20, so the upper limit is Rs 400 plus Rs 20 = Rs 420.
3. A company's profit rose 15 percent, but its price fell. Name one likely reason.
   Answer: People may have expected a bigger rise, so 15 percent was a disappointment compared with the expectation. Other news on the same day could also play a part.

Where to check this yourself

Use these official websites to read company announcements, price band rules and investor guidance first hand.

• National Stock Exchange (NSE): company announcements, results and circulars on price bands.
• BSE: company announcements and results for shares listed on BSE.
• SEBI circular on market-wide circuit breakers: the original framework for index-based trading halts.
• SEBI investor website: free guides for new investors.
• Reserve Bank of India: policy rate decisions and inflation reports.

To see how orders reach the exchange in the first place, read how the stock market works.