How Do Company Earnings Move Stock Prices?

  Author: Kundan Kishore

Who can miss the buzz in the media related to stock markets when news about corporate earnings comes out at the end of every quarter? That not to forget the company share prices going up or down due to developments that could impact their earnings.

Higher share of earnings for investors Most of us are aware that when a company’s earnings increase, its stock prices also go up, all other factors staying constant. This is because the company earns more, and as an investor, you get a larger share of the earnings either through dividends or capital appreciation. One way of measuring this is by figuring out what is called the earnings per share (EPS). We will discuss this in greater detail in another discussion.

Importance of investor expectations If a company’s financial performance beats investor expectations in terms of higher sales, profits or profit margins, more people will want to buy or hold the stock and its price will go up.

If the market expects the company to grow fast, they would like to stay invested in the stocks since they expect the stocks to appreciate in future. This would cause a greater demand for the stocks and hence the stock price would go up.

Therefore, it is fair to conclude that earnings and earnings prospects both expectations influence stock prices. As a prospective investor, you need to take a look at how the earnings of a company have been growing over the years. In India, if the earnings has been growing at 15% or more, the stock merits further examination.

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