2-3 Sorting Out Why a Price Moved
A page splitting moves into the whole market, group factors, and company news, as an entry point to CAPM and factor models
2-2 established that share prices move on both today's figures and expectations for the future. So when a price actually moves, how should you sort out the reason?
- Splitting the reason into
the whole market,group factors, andcompany-specific newsmakes it much easier to sort out. - It means something different whether the whole market moved, a group of similar shares moved, or there was news specific to that company.
- CAPM is a way of thinking that starts from
the whole marketas the factor behind an asset's return. - Because the market factor alone leaves things unexplained, looking through several factors such as size and value became widespread.
- What matters is not settling on one answer, but sorting out which factors look like they were at work and how much.
1. Three buckets make the reason easier to sort out
When a price rises, it can be premature to conclude it rose because this company was recognised. The first thing to check is whether the whole market moved, whether a group of shares close to this one moved, or whether there was news specific to the company.
Splitting it into the following three, for example, makes it easier to think about.
The whole market: the part where many shares move in the same direction on rates, the growth outlook, or the general mood.Group factors: the part where shares sharing a trait — sector, theme, size, whether they look cheap — move together.Company-specific news: the part driven by news about that company alone, such as earnings, guidance, a product launch, or a scandal.
2. The Capital Asset Pricing Model (CAPM) starts from the whole market
Among the attempts to make sense of these moves and returns, CAPM became the first to be widely known. CAPM approaches each asset's return by asking how sensitive is this asset when the whole market moves. At this stage it is enough to treat it as a way of looking at how much a share tends to move along with the market.
3. The market alone is not enough, so look through several factors
Looking at actual prices and returns, the whole market often fails to explain everything. Small-cap shares can be bought as a group even when the market overall is not especially strong. There are phases where cheap-looking shares are re-rated, or where shares with momentum keep being bought. So factor models — looking at several factors alongside the market — became widespread. Well-known examples include the Fama-French three-factor model, and four-factor versions that add momentum.
| Factor | What it looks at | What that looks like in practice |
|---|---|---|
| Market | Whether it moved along with the market | The market was strong and many shares rose together |
| Size | Whether small caps beat large caps, or the reverse | Small-cap shares were bought as a group |
| Value | Whether cheap-looking shares were re-rated | Low-P/E and low-P/B shares were relatively strong |
| Momentum | Whether strong moves are continuing | Shares that had already risen were bought further |
Seen this way, it becomes a little easier to sort out whether the market was simply strong, whether a particular group of shares was strong, or whether company-specific news was the bigger driver. You avoid stopping at it just moved, and you are also less likely to over-conclude that good earnings explain all of it. CAPM and factor models are easiest to understand not as ways to settle a price move into a single story, but as one lens for sorting out moves and returns.
Next, 2-4 What is a dividend? covers dividends — a return separate from price appreciation.