Why do stock prices change based on news reports?

Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular stock, its market price will increase. Conversely, if more people want to sell a stock, its price will fall. This relationship between supply and demand is tied into the type of news reports that are issued at any particular moment.

Negative news will normally cause individuals to sell stocks. Bad earnings reports, poor corporate governance, economic and political uncertainty, as well as unexpected, unfortunate occurrences will translate to selling pressure and a decrease in stock price.

Positive news will normally cause individuals to buy stocks. Good earnings reports, increased corporate governance, new products and acquisitions, as well as positive overall economic and political indicators, translate into buying pressure and an increase in stock price.

For example, a hurricane making landfall may cause a drop in utility stocks. Meanwhile, depending on the severity of the storm, insurance stocks could also take a hit on the news (or even climb higher if the expected damage is projected to be moderate).

But it's difficult, if not impossible, to capitalize on news. The impact of new information on a stock depends on how unexpected the news is. This is because the market is always building future expectations into prices.

For example, if a company comes out with better-than-expected profits, the stock's price will likely jump. But, if that same profit was expected by a majority of investors, the stock's price will likely remain the same as the profit would have already been factored into the stock price. Thus, it's unexpected news – not just any news – that helps drive prices in both directions.

(For further reading, see What Causes Prices to Change? and Trading on News Releases.)