Why do stock prices change dramatically in value within seconds after release of financial results? After all, it is impossible to analyze such a large amount of information in such a short time.
In: Economics
Most large fund and institutions have very sophisticated models used to determine the “correct” price for a stock. These models, despite the sophistication, rely on only a few core metrics. Moreover, they have the capability to do “what if” scenarios, determining what the “correct” price should be if any of those core metrics change.
So when new financial results come out, it is as simple as taking the core financial data, inputting it into the model, and seeing what the new outputs are. Modern technology can do this in seconds, giving you an updated “correct” price very, very quickly. Companies act fast on these new outputs, as buying/selling within seconds can net you significant returns.
With the initial shock out of the way, analysts will do deeper dives into the qualitative information from the reports and revise the models over the next few hours/days, resulting in adjustments to price post shock.
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