Stock Price Movements – Expectations Matter

The ups and downs of the stock markers are driven by events or rather by information regarding those events.

These events can be both internal or external to a firm.

Examples of internal events could be the winning of a contract, the declaration of quarterly results or even allegations of fraud against the management or promoters of the company.

Events external to a firm, over which a firm has little direct control, include the grant of tax sops by the government or a change in economic conditions favouring a particular sector or industry.

Events cannot always be considered in isolation.

Events however, cannot always be considered in isolation while making buy or sell decisions. There is one other factor at play and this is the expectations (regarding those events) of the market as a whole.

Let us take the example of quarterly results. Even before the results are declared, the market forms an expectation about what these results are going to be.

These expectations are built upon a number of factors and include knowledge about variables like sales data among others.

In the build up to the declarations of the actual results, these expectations are often factored into the price of the stock concerned.

When the results are in line with the expectations, the actual announcement of the result might fail to generate much excitement in terms of price movement, no matter how significant the growth the revenues might have been. In fact we might even witness some amount of sell off on the results date.

This is because as stated above, the expectations had already been factored into the current price of the stock.

Conversely, when the actual results fall behind the expectations, we might witness some significant sell off in the stock.

Events therefore cannot always be considered in isolation while forming buy or sell decisions. One needs to be mindful about the expectations that the markets have about those events as well.