Four reasons why a company’s stock price rises dramatically in a single day

Each stock price movement has a unique story to it, which needs to be researched. I share below the four most common reasons I have seen behind 1 day stock price increase (dramatic).

Before that, I will assume dramatic price increase in 1 day means 5–10% increase. I think this is a decent definition of dramatic increase, given 10–12% is what Nifty 50 index gives in an year. So if you get that kind of return in 1 day, I think that is dramatic enough. I have used examples of listed companies in Indian stock market in this post.

Reason 1: Quarterly Earnings Report exceeds expectations

People buy stocks at a valuation which seems justified to them. A slow growing company gets lower valuation (lower PE). A high growing company is assigned a higher valuation (high PE) by the market.

Earnings forecasts from equity analysts play a large role in shaping market’s expectations from a stock, and resulting valuations. Company reports published by equity analysts are widely read by investors. These analysts are also interviewed on TV to share their opinion on a company’s future, expected stock price gains to be made etc.

When a company announces quarterly results, which far exceeds the estimates provided by analysts, it causes a short term euphoria in the market. Rise in earnings leads to lowering of PE. This makes the stock look attractive. Investors rush in to buy the stock, thinking it is available at a cheaper valuation given the sharp rise in quarterly earnings.

Example: Dr Lal Path Labs announced a stellar Q1 FY 22 earnings on 30th Jul 2021. Revenue increased 2X year over year, profits increased 3.5X year over year, beating estimates. As a result, Dr lal Path labs increased by 9.5% when the markets opened on 2nd Aug 2021 (Monday).

Quarterly earnings, which beats estimates by a large margin, usually lead to sharp single day increase in share price. This positive momentum can last for a couple of trading sessions to a week, till it stabilizes and corrects a little.

Reason 2: Announcement of Merger/Acquisition or Order wins

Any news, which solidifies future earnings growth of a company, will lead to dramatic price increase in a single day. These news raises expectations of the market of faster growth of the company. Hence investors rush in to buy the stock in anticipation that future earnings of the company will increase, leading to gains made from stock price increase.

Example1: HDFC Bank and HDFC announced their merger on 4th April, 2022. This is a positive news, as it will reduce cost of funds for HDFC, and provide synergies to both companies. HDFC Bank share price jumped 17% from the lows of 1st April (INR 1470), to INR 1722 on 4th Apr post announcement.

Example 2: Adani announced completing acquisition of Ambuja Cement. Adani is considered as an aggressive promoter. On the news of Adani Group completing acquisition of Ambuja Cement on 16th Sep, Ambuja Cement’s price jumped from INR 511 on 16th Sep to INR 572 (12% increase) on the next trading session on 19th Sep.

Example 3: KNR Construction wins INR 607 crore order, stock price jumps 6%. KNR construction, a construction company as the name suggests, won a INR 607 crore order to develop Chennai to Kanyakumari industrial corridor (refer article here). These order wins secures future revenue outlook for construction companies. This attracts investors to invest, knowing a sure future revenue growth in the company.

Reason 3: Inclusion in the Index

Index investing is a passive form of investing. It is a low cost, low risk, average to high returns form of investing. Index investing is very popular in the US, and is catching up slowly in India. Index investing is done via index mutual funds, or index ETFs. When an investor invests in an index, it is investing in all the companies which constitute the index.

Index funds usually have thousands of crores as total assets under management. Example: For Nifty Next 50 index, the top two MF schemes (UTI Next 50 and ICIC Pru Next 50 fund) together have INR 5500 crore under management as on Feb 2023. This means that when a company enters Nifty Next 50 index, that day crores of funds managed by these MF schemes will flow into the stock, causing the stock price to dramatically increase.

Example: Bharat Electronics (BEL) was included in Nifty Next 50 index on 30th Sep. BEL’s stock price rallied by 7.3% from Sep 30 to 3rd Oct (the first trading session post the index changes).

Reason 4: Star Investor buys the stock

Star investors are well known, often talked about in media, high net worth investors.

When star investors invest in a stock, the stock price rises because of two reasons. First is because star investors pump a lot of money to buy the stock. This increases demand with limited supply, causing the stock price to increase. Secondly, on the news of star investors investing in a stock, many retail investors jump in as well. Star investors investment decision builds trust in the company, and influences other investors to invest.

Example: Goldiam International is a lab diamond manufacturer and seller. After star investor Ashish Kacholia picked up 1% stake in this company in Dec’22 quarter, the stock price rallied 16% in a single day. Wow! refer article here for more details.

Parting Thoughts

Above four are the most common reasons for dramatic stock price increase in a single day. Do note that all dramatic single day price increase are immediately followed by some consolidation, or correction in price. Hence, for long term investors, it is important to not react to news. Rather, let the news sink in, wait for consolidation of stock price at a stable level, and then buy.

There can be many more reasons for stock price increase. Stock price movement always has a story behind it, and uncovering that story is the fun part of investing. Sometimes, the story is evident from news articles. Sometimes, it is not so evident, and one needs to dig deeper to uncover the story.

Which single day stock price increase surprised you? Do share in comments below.

Happy investing!

Disclaimer: This answer is not a stock recommendation. Do your own research before investing.