Originally Posted by Moneyball
How much of it has to do with the strength of a company, and how much has to do with the ratio of buyers to sellers?
Specifically, how does a stock price go up just because the company is supposed to do well? Are they putting money back into the shares as they do well? Is it kind of like investing $1 in a lemonade stand and getting back $2 when it succeeds?
The "intrinsic value" of a stock would probably be some measure of book value and a minimum level of discounted cash flows. The "extrinsic value" would comprise of a premium on it's net worth and future cash flows. Typically blue chip stocks trade at a higher price-to-book, where riskier firms trade at lower price-to-book. It should be noted, there is no "right" value of a stock. Each and every day the net worth of a stock is evaluated through trading, based on the perceptions of market participants.
As to how the stock price actually increases and declines based on material earnings news, it is the buying and selling of shares from huge players, either through active trading or computer trading. Buying drives up prices as it takes out offers and selling drives down prices by taking out bids. If at any time there is a discrepancy between what an automated system believes is the true value, it will buy or sell to take advantage of the (perceived) difference. As news emerges on the wire, human traders and automated traders continually reevalute a stock's value and execute trades based on their undervalued/overvalued analysis.