Here's the long story: There are millions of investors and billions of participants in the world's economy. On any given day, each of these individuals make decisions based on the information they have available. This adds up to many billions of decisions made daily as a result of trillions of pieces of information. The results of these decisions affect businesses and consequently their stocks.
Of course, not all information is created equally, and not all decisions have the same level of influence. If a man in India buys a new razor, the company selling that razor made some money, but it's probably not a huge deal. However, what if the government in India levies a 300% tariff on razors from U.S. companies because they're putting domestic razor manufacturers out of business? Now that's a little bit higher on the impact scale.
But what if this tariff is unfounded? What if Indian razor manufacturers were failing because of internal corruption? Well, the U.S. manufacturers could go to court and have the tariff lifted and if that were the case, as quickly as their shares fell, they would surely rise - perhaps even higher than before the tariff was instituted.
Why would the share price be even higher after all of this? If the tariff is indeed found to be illegal, and Indian manufacturers are very weak as a result of internal corruption, this means investors would likely bid up the price of U.S. razor companies under the belief that their Indian competitors will be put out of business, thereby expanding the profit opportunity.
In bullet points, here's what happened in this example:
- Pre-tariff: Indian and U.S. companies compete in India
- Pre-tariff: Indian companies are struggling financially and ask the government to add a tariff to U.S. razors to boost sales
- Tariff: The Indian government responds by creating a tariff to protect local jobs; U.S. shares decline, Indian shares climb
- Post-tariff: The U.S. companies file a grievance and take the issue to court
- Post-tariff: The court finds that the Indian companies in question are poorly run and have a great deal of corruption. As a result, the court orders the tariff lifted. U.S. shares rise above initial prices, Indian shares fall below initial prices
What this story tells us is that prices fluctuate based on information and decisions. With the size and reach of large companies today, there is a mountain of information to sift through and a multitude of decisions made outside the company that influence share price. Unless you can account for all of this, you cannot predict share prices and this is why we never care about share price target estimates - you simply cannot make accurate predictions because information and decisions are constantly changing and are rarely, if ever, perfect.
Here's the short story: When demand for stocks is different than the supply for stocks at a given price point, stock prices change. Wow, that was easy!