Lesson 03 · 4 min · 6 things to do
Only surprises move prices
Predict which news moves a price and which does not.
A company reports record profits — and its share price falls. What is the most likely explanation?
- Yes.The price before the announcement already contained everyone's expectation. Only the gap between expected and actual is new information, and here the gap pointed down.
- Not quite.It is the most common reading of this pattern and the least useful. The behaviour follows directly from prices being set in advance of the news.
- Not quite.Possible on any given day, and unnecessary here — the pattern appears constantly, across thousands of companies.
A price already contains what everyone expects. Only the surprise is new, so only the surprise moves it.
A company is expected to report £100m of profit. Slide the actual figure and watch the price.
£80m£100m£120mWhat the market expected£100mWhat the company reported£80m£80mA big miss. The price falls hard, even though £80m is a profit.
What the market expected£100mWhat the company reported£100m£100mExactly as expected. The price barely moves — the news was already in it.
What the market expected£100mWhat the company reported£120m£120mA beat. The price jumps on the difference, not on the profit.
All three frames report a healthy profit. Why does only one of them fall?
- Yes.This is the single most useful idea in reading financial news. "Profits up 20%" is not a market story until you know what was expected.
- Not quite.It is a good result. It is a good result that somebody has already paid for a better one.
- Not quite.The direction is fully explained without it. Overreaction is an argument about the SIZE of the move.
Move the control to see what changes.
Which of these should move a price, and which is already in it?
A scheduled dividend, announced months ago.
A factory fire nobody saw coming.
A widely predicted interest rate rise, at the predicted size.
A regulator opening an investigation nobody knew about.
A well-flagged retirement of a chief executive.
Yes.Anything that has been known for weeks has been traded on for weeks. This is why a huge, obvious, long-discussed event can arrive to a shrug — and a small unexpected one moves everything.A central bank raises rates by exactly the amount everyone expected, and markets rise. What happened?
- Yes.The decision was priced; the guidance was not. Most 'inexplicable' reactions to expected news are reactions to the sentence after the number.
- Not quite.Usually the opposite, all else equal. And all else is what changed here.
- Not quite.The expectation about the rate was exactly right. That is precisely why it could not be what moved anything.
Analysts expect earnings of 50p a share. The company reports 56p. What is the surprise, in percent?
%Yes.6 ÷ 50. The market reacts to that 12%, not to the 56p — which is why two companies reporting identical profits can move in opposite directions on the same morning.You read that a share "jumped on strong results". What is the missing piece?
- Yes.Without the expectation, the sentence cannot be checked or predicted from. Adding it turns a piece of colour into something you can actually reason about.
- Not quite.Usually given, and it tells you the size of the reaction rather than what caused it.
- Not quite.Useful for judging how meaningful the move is, and still no substitute for the expectation.
Lesson complete
Prices already hold what everyone expects, so only surprises move them.
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