Price Change: Definition, Types, Causes & Effects

What Is a Price Change?

A price change in the stock market is a shift in the value of a security or another asset to either a higher or lower level. The term also refers to the difference between a stock's closing price on a trading day and its closing price on the previous trading day.

How Price Changes Work

Although it can be computed for any length of time, the most commonly cited price change in the financial media is the daily price change, which is the change in the price of a security from the previous trading day's close to the current day's close.

Equity analysts also commonly consider year-to-date, and latest-12-month price changes when analyzing a company.

Predicting Price Changes

The price change is a core component of financial analysis. Predicting price changes can be as, if not more, important than the change itself. Price change forms one of the two factors that comprise the total return from an investment over a period of time. The second factor is any dividends or distributions obtained from the investment.

When discussing price changes in the market, it's important to consider "price change" in context, whether it be time frame—daily, year-to-date, and latest-12-month price changes, or type—percentage, absolute, or net. There are numerous metrics in investment analysis that involve price change—such as the price-to-earnings ratio (P/E ratio) in fundamental analysis and the rate-of-change indicator (ROC) in technical analysis.

Percentage Price Change

The percentage price change is generally the norm for computing asset performance. It is important to remember that percentage-based price changes are useful only in the context of the number of dollars at play. A 75% change in the price of a box of cereal, for example, may only involve a few dollars while a 75% change in the price of Berkshire Hathaway may involve thousands of dollars.

Absolute Price Change

For shorter intraday periods, an absolute price change may be used by momentum and algorithmic traders as the basis for trading and arbitrage strategies.

Net Change

Net change is the difference between a prior trading period’s closing price and the current trading period’s closing price. For stock prices, the net change is most often referring to a daily time frame, so the net change can be positive or negative for the day in question.

Why Price Changes Are Important

A security's price likely is the most visible barometer of an issuer's financial health. Companies, their management, shareholders, and investment banks are some of the constituents that care about changes in securities' prices. So, whenever a stock's price increases or decreases, you can be sure that management teams and others, will be watching it closely. Naturally, they want their stock to perform well because they're in the business of making money. Here are some more reasons to care:

• The stock price is often an early indicator that market participants are either happy or worried about an issuing company's prospects.
• A company's stock price reflects investors' perception of its ability to earn and grow profits.
• If shareholders are happy and the company is doing well, as reflected by its share price, the current management likely would remain with the company and receive bonuses.
• A company also might be concerned with its stock price because it fears a takeover; an acquiring company might pursue a takeover if it believes that the target company is well priced.
• If a company and its stock price are performing well, the company likely would receive more favorable press from analysts and the media.

Understanding the Effects of Price Changes

If publicly-traded security experiences numerous price changes in a relatively short time, this could be labeled as a period of volatility. When a security’s price changes positively, its value increases, and it might attract the attention of more investors who would buy shares in the hopes of seeing higher returns. Price changes naturally can include declines, in which case investors tend to sell off stock, which could negate any gains.

Company-Level Factors

Activities directly associated with companies can drive price changes in publicly traded securities. A change in executive leadership, the announcement of new strategies or products, and the positive reception of a company's’ products in the marketplace all could drive price increases.

If a company invests considerable time and resources to create a new product line, how the product is received by customers could affect the company’s earnings. If an analyst reports that the product’s sales were above target, the company’s shares may see a positive price change as investors purchase more stock in response. Conversely, if a company sees some of its products perform poorly with its customers, then the shares may fall in value.

External Factors That Can Drive Price Changes

External factors such as industry shifts, government regulations, or even severe weather that affects company operations can also influence price changes; investors and analysts weigh how those elements may influence a company's’ performance in the future. Examining a historic range of price changes also can be a way to put into perspective the impact that particular events have had on a company’s valuation.