What really causes stock prices to go up and down? Let's understand supply and demand and investment applications.

When you look at stock swing charts going up and down, you might wonder what drives the price movement. The truth is, the answer lies in a fundamental concept that economics has used for centuries: Supply and Demand. This principle is not just a classroom theory but a practical tool that investors can use to read the market and make trading decisions.

Supply and Demand: Two Forces Controlling Price

Imagine the market as a battlefield between two forces. One side is the buyers hungry for (Demand), and the other side is the sellers offering (Supply). Prices do not move in a single direction solely based on one side; rather, they result from the pressure exerted by both sides.

First factor to understand: What is demand?

Demand (Demand) is the market’s desire to buy. It’s not just people wanting a product at home, but the ratio between price and the quantity people are willing to buy at that price.

The law of demand states: When prices fall, demand increases; when prices rise, demand decreases. This inverse relationship occurs for two reasons:

Income effect: When goods become cheaper, your wallet has more money left, so you buy more.

Substitution effect: When this good is cheaper than similar goods, you choose this one instead.

Demand sources are diverse: price, buyers’ income, prices of substitute goods, tastes, number of buyers, and expectations about future prices. External factors also influence demand, such as seasons, government policies, technology, and public sentiment.

Second factor: What is supply?

Supply (Supply) is the quantity of goods that sellers are willing to offer at various prices. Like demand, it’s the ratio between price and quantity.

The law of supply states: When prices increase, sellers want to sell more; when prices decrease, they want to sell less. This is a direct relationship because sellers seek profit.

Factors affecting supply include: price, production costs, prices of alternative products, number of sellers, technology, and price expectations. Weather, natural disasters, tax policies, exchange rates, and access to capital also play roles.

Key point: Equilibrium (Equilibrium)

Now, here’s where the magic happens. When the demand and supply curves intersect, they create a point called equilibrium, where price and quantity are balanced.

Why equilibrium? Because:

• If the price is above this point: sellers want to sell more, but buyers want to buy less. Excess supply → price drops.
• If the price is below this point: buyers want to buy more, but sellers want to sell less. Shortage → price rises.

This equilibrium point is where the market “pauses” temporarily until new factors come into play.

Supply and Demand in Financial Markets: Why Investors Should Care

Now, let’s extend this standard to stocks and financial assets. Stocks are traded in markets just like any other natural resource, so supply and demand apply.

Factors from demand affecting stocks

Economic conditions: When the economy grows, interest rates are low, and inflation is normal, investors are more eager for stocks because corporate earnings are expected to be good.

Liquidity: When the financial system has abundant money flow, people have funds to invest, increasing demand.

Investor confidence: This is a psychological game. If people think the future is bright, they buy; if they are worried, they sell.

Factors from supply

Corporate policies: Stock buybacks reduce the number of shares in circulation, decreasing supply. Capital raising increases supply.

New companies entering the market: When IPOs happen, new stocks flood the market, increasing supply.

Regulations: Rules about selling stocks, such as (Silent Period), affect supply.

The importance: Both factors work together

When the economy is good (demand increases), new companies may enter the market (supply increases). The final price movement depends on which force is stronger. That’s why stock prices are complex.

Using supply and demand to analyze stocks

Investors can apply this concept in two ways:

Method 1: Fundamental analysis

If a stock drops, it indicates heavy selling (high supply) or low demand (lower demand). If a stock rises, it shows increased buying (high demand).

Fundamental factors that influence demand include:

• Expected earnings
• Economic growth prospects affecting income
• Business changes

Good news makes buyers willing to pay more → prices go up.

Bad news causes buyers to hold back, sellers to lower prices → prices go down.

Method 2: Technical analysis

Traders use various tools to measure actual demand and supply:

Reading candlesticks:

• Green candle (Close above open) = demand wins
• Red candle (Close below open) = supply wins
• Doji (Open and close are close) = indecision, no clear trend

Trend analysis:

• If prices make new highs consistently = demand wins, uptrend
• If prices make new lows consistently = supply wins, downtrend
• If prices move within a range = balanced forces

Support and resistance:

• Support = where buyers are waiting to buy (strong demand)
• Resistance = where sellers are waiting to sell (strong supply)

Practical application: Demand Supply Zone techniques

A popular method is Demand Supply Zone, which looks for clear imbalances in price.

Scenario 1: Reversal (Reversal)

DBR - Demand Zone Drop Base Rally:

• Price plunges (Drop) due to excess selling
• Then consolidates in a base (Base)
• When good news arrives, buyers return strongly, price rises (Rally) → Traders buy at breakout above the base

RBD - Supply Zone Rally Base Drop:

• Price surges (Rally) due to excess buying
• Then consolidates in a base (Base)
• When bad news hits, sellers return strongly, price drops (Drop) → Traders sell at breakdown below the base

Scenario 2: Continuation (Continuation)

RBR - Rally Base Rally:

• Price rises strongly (Rally)
• Consolidates in a base (Base)
• Good news arrives again, buyers remain strong, price continues up (Rally) → Traders follow the trend

DBD - Drop Base Drop:

• Price drops strongly (Drop)
• Consolidates in a base (Base)
• Bad news arrives again, sellers remain strong, price continues down (Drop) → Traders follow the downtrend

In all cases, understanding what demand and supply are helps you better time your trades.

Summary: Why demand and supply are crucial for investors

Demand and supply are not just economic terms at home. They are the market’s price design system. Traders and investors who understand this deeply can read the market better and predict price directions more accurately.

Whether you use fundamental analysis (news factors) or technical analysis (charts and volume), ultimately, you are looking for signals of changing demand and supply.

To master it, don’t avoid studying and, most importantly, practice with real prices often to develop intuition and see the bigger picture.