- to reflect business reality (or investor perceptions of that reality) or
- to reflect short-term variations in supply and demand.
Reality can change in a number of ways,
- some company-specific,
- others macroeconomic in nature.
- If Coca-Cola's business expands or prospects improve and the stock price increases proportionally, the rise may simply reflect an increase in business value.
- If Aetna's share price plunges when a hurricane causes billions of dollars in catastrophic losses, a decline in total market value approximately equal to the estimated losses may be appropriate.
- When the shares of Fund American Companies , Inc., surge as a result of the unexpected announcement of the sale of its major subsidiary, Fireman's Fund Insurance Company, at a very high price, the price increase reflects the sudden and nearly complete realization of underlying value.
On a macroeconomic level
These factors could each precipitate a general increase in security prices:
- a broad-based decline in interest rates,
- a drop in corporate tax rates, or
- a rise in the expected rate of economic growth.