ELi5 : Why does the stock of a company fluctuate when it is involved in a controversy?
In: Economics
The value of a stock is based on people perceptions of that value. When brand new news becomes available (either good or bad news) then this perception changes, and with it the price will change. But right as it’s happening not everyone will know the news, which causes different opinions on the current value, leading to some people thinking the price should be higher and others thinking it should be lower, which causes it to fluctuate in a flurry as all the people that think it should be higher start to buy, and all the people thinking it should be lower start to sell. After the initial shock you still have fluctuations as people try to understand the full impact of the news. As more analysis and more information becomes available eventually a new fairly stable consensus point will be reached, and the stock price will adjust to this new point.
For example, right as a company releases a quarterly report, it’s frequent that it contains some mixed information. So, for example, the company beats consensus estimates for the quarter, but gives mixed guidance for the next year. Everyone is in a rush to exploit this new information, but know one really knows exactly what it means until they can do some work making a full assessment, and the after hours price will jump all over the place. By the next morning a consensus might have formed about what all the news means and the opening price is actually quite different than the after hours price, another small flurry at open as things adjust, and then things stabilize again.
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