Security Prices Move Up and Down for Two Basic Reasons: Business Reality or Supply and Demand

Security prices move up and down for two basic reasons:

• 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. 

Company-specific factors

• 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.