How Prices Get Set

If you look at enough individual stocks, you begin to notice that price changes rarely line up neatly with changes in business value.

In calm periods, prices tend to drift around estimates that feel reasonable. Earnings come in, guidance adjusts slightly, and nothing forces immediate action. In those moments, the market looks almost mechanical.

The interesting behaviour usually starts when something pushes price away from where it has been sitting.

Price Moves Come From Surprise

A stock does not move because earnings are good or bad in absolute terms. It moves because results differ from what was already assumed.

If a business earns £1 when the market expected £1.20, the price tends to fall. If it earns £0.80 when the market expected £0.60, the price often rises. The numbers matter, but only relative to the expectation embedded in the price.

You can often see this by working backward. Take the current price and ask what set of assumptions would make it reasonable. Those assumptions tell you what the market already believes.

If you agree with them, there is little reason to expect a different outcome. If you disagree, the question becomes whether that disagreement will eventually matter to price.

Why Mispricing Can Persist

Many securities remain mispriced not because information is missing, but because nothing forces a reassessment.

A stock can sell at a low multiple for years if the business is dull, small, or unfashionable. Institutions may be unable to own it. Analysts may have no incentive to cover it. The numbers can be plain to see, yet expectations remain fixed.

In those cases, price does not change because belief does not change.

The opposite can happen as well. A business with a compelling story can trade at a valuation that assumes years of smooth growth. As long as results roughly match that story, price holds. The valuation may look stretched, but nothing breaks it.

Prices tend to move only when expectations are disturbed.

Forced Selling and Buying

Price changes are not driven only by investors changing their minds. They are often driven by investors being forced to act.

Leverage creates this effect. A fund that borrows to increase returns may be required to sell if price moves against it, regardless of long-term value. Stop-loss orders create the same result. Once those levels are hit, participants become price agnostic. They sell regardless of their view because the order is already set.

That selling rarely ends with a single order. One forced sale pushes price into the next level, triggering the next order, and so on. The process becomes sequential rather than deliberate.

This is why prices can overshoot in both directions. Forced buying and selling do not stop at fair value - they stop only when the forced orders have been exhausted.