Why Are Stock Price Fluctuations Random?

Summary：while stock price movements involve a rational response to new information, the arrival of that information is inherently random, making the subsequent price fluctuations unpredictable.

Let’s use an apple tree as an analogy. Imagine an apple tree that produces ten apples every year. Now, suppose a storm strikes and splits the tree in half, reducing its future yield to just five apples per year. You would immediately recognize that the tree’s value has halved.

Here’s the key question: When does this reduction in value occur? Does it happen now, or next year when it produces fewer apples? The answer is: it happens immediately. The moment you learn that the tree is damaged and its future yield is reduced, its value drops in the present.

The same logic applies to stock prices. When new information becomes available—whether it’s good or bad—stock prices adjust instantly to reflect that information. For example, if news comes out that negatively impacts a company’s future performance, the stock price will immediately adjust downward, not at some point in the future.

In this process of reassessing the apple tree’s value (or a stock's price), scientific knowledge and expert analysis come into play. Experts might assess the damage to the tree, use past experience, and apply scientific principles to make accurate forecasts about its future productivity. This is the same way analysts adjust their stock price estimates based on new information. The adjustment period is quick, and it involves processing and applying scientific understanding.

Once this new information has been absorbed by the market, stock price movements become random. Why? Because the timing and nature of new information—the key driver of price changes—are unpredictable. Therefore, after the initial adjustment based on new information, stock prices follow a random walk, driven by unexpected future events.