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What makes your stock price go up and down
CEOs always want to know how the market will react to new strategies and other major decisions. Will a company’s shareholders agree with a particular move, or will they fail to understand the motives behind it and punish the stock accordingly? And what can management do to improve the outcome?
Trying to predict stock price movements is necessary, of course. After all, when stock prices fall, the cost of borrowing and of issuing new equity can rise, and falling stock prices can both undercut the confidence of employees and customers and handicap mergers. Unfortunately, however, most of these predictions are no more than rough guesses, because the tools CEOs use to make them are not very accurate. Net present value (NPV) may be useful for estimating the long-term intrinsic value of shares, but it is famously unreliable for predicting their price over the next few quarters. Conversations with sample groups of investors and analysts, conducted by the company or by investment bankers, are no more reliable for gauging market reactions.
But executives can dramatically improve the accuracy of their predictions. By adopting a more systematic, rigorous approach, corporate leaders can learn to understand individual investors as thoroughly as many companies now understand each of their top commercial customers. It is possible to know such customers well because there are only so many of them. Equally, only a finite number of investors really matter when it comes to predicting stock price movements.
Every CEO knows that when buyers are more anxious to buy than sellers are to sell, share prices rise—and that they fall when the reverse happens. But fewer CEOs know that not every buyer or seller matters in this equation. Our research on the changing stock prices of more than 50 large US and European listed companies over two years1 makes it clear that a maximum of only 100 current and potential investors significantly influence the share prices of most large companies. By identifying these critical individual investors and understanding what motivates them, executives can predict how they will react to announcements—and more accurately estimate the direction of stock prices.
