Why have stock prices changed? What do supply and demand mean?

If you’ve ever wondered why stock prices go up today and down tomorrow, the answer might lie in a simple concept called supply and demand. This idea isn’t complicated, but it is the fundamental basis that accurately explains movements in financial markets.

Buying and Selling Demand: The Foundation of Price Determination

The stock market is like a rice market. Prices are determined by the balance between two sides. One side wants to buy (demand), and the other wants to sell (supply). When this balance is disrupted, prices will move.

Demand refers to the desire to purchase a product, or in the case of financial markets, the desire to buy stocks at various prices. If the price drops, buyers want to buy more. If the price rises, buyers want to buy less. This is the law of demand, which states that there is an inverse relationship between price and quantity demanded.

Supply refers to the desire to sell a product, or the amount of stocks sellers want to put on the market. When prices are high, sellers want to sell more. When prices are low, they want to sell less. This is the law of supply, which moves in the opposite direction to the law of demand.

Factors Driving Buying and Selling Decisions

Demand isn’t driven by price alone; many factors influence investors’ decisions:

• Macroeconomic conditions: When the economy is growing well, people are more confident and willing to pay higher prices.
• Liquidity in the system: When there is plenty of money, investors have more opportunities to buy.
• Confidence and expectations: Good news, bad news, political situations, expected earnings—all influence whether buyers rush in or exit quickly.
• Market trends and preferences: Sometimes stocks become popular because they are “the best” in the market.

Supply, on the other hand, is affected by:

• Company policies: Share buybacks reduce the number of shares in circulation; issuing new shares increases supply.
• Major shareholders wanting to sell: News that large shareholders are selling can cause prices to fall.
• New market entries (IPOs): Initial Public Offerings increase the supply of securities.
• Production costs and technology: These factors influence how much sellers want to sell.

Where Prices Stop: What is Equilibrium?

Demand alone or supply alone doesn’t set the price. Prices are established at (Equilibrium)—the point where demand and supply curves intersect.

Think of it like this:

• If prices rise too high, sellers will offer more, but buyers will hold back, leading to excess supply and a price correction downward.
• If prices fall too low, buyers will want to buy more, but sellers will hold back, leading to a shortage and a price increase.

Equilibrium is the point where prices can stabilize and tend not to change because both sides are satisfied.

Demand and Supply in the Real Stock Market

In the stock market, demand and supply refer to the collective actions of investors buying or selling, influenced by many interconnected factors:

Liquidity levels and interest rates: When central banks cut interest rates, people tend to move money into investments, increasing demand.

Company performance: When a company reports strong earnings, demand increases as buyers rush in; if earnings disappoint, sellers exit, increasing supply.

Fear and hope: During panic, many sell, increasing supply; during optimism, buyers wait and see.

Reading Stock Prices to Determine Demand and Supply

Technical analysts say we can observe demand and supply through candlestick charts:

Green candlestick (closing price higher than opening price) indicates buyers won today, strong demand, likely prices will continue rising.

Red candlestick (closing price lower than opening price) indicates sellers dominated today, strong supply, likely prices will continue falling.

Doji (opening and closing prices are the same) suggests buying and selling forces are balanced; direction is uncertain, wait and see.

Making Buy/Sell Decisions Using Demand Supply Zones

There is a technique called Demand Supply Zone based on this concept, identifying points where prices move rapidly and then pause to “calm” before moving again.

Drop-Base-Rally (DBR) pattern: Price drops sharply, then pauses; when buyers return with strength, prices rally. Traders buy at breakout points above the pause zone.

Rally-Base-Drop (RBD) pattern: Price rises sharply, then pauses; when sellers regain strength, prices fall. Traders sell at breakdown points below the pause zone.

Trend continuation: Often, momentum continues—uptrend → pause → uptrend again; downtrend → pause → downtrend again. Traders follow the trend and enter at breakout points.

Fundamental Analysis Using Demand and Supply

Fundamental analysts view demand and supply from different perspectives, focusing on factors that influence buying or selling:

• Expected good earnings → increased demand
• Rumors, such as entering new markets or hiring new management → can increase or decrease demand
• Security issues or disruptions → reduce demand, increase supply
• General economic factors like interest rates, currency value, market liquidity → affect large groups

Support and Resistance: Waiting Zones

Support is a price level where demand is strong enough to prevent prices from falling further; buyers are waiting, so prices tend to bounce back up.

Resistance is a price level where supply is strong enough to prevent prices from rising further; sellers are waiting, so prices tend to reverse downward.

Investment Strategies: Applying Demand and Supply

For fundamental analysts: Follow news, earnings forecasts, industry conditions, and overall market position to anticipate when demand will increase.

For technical traders: Observe candlestick patterns, price trends, support/resistance levels, and use Demand Supply Zones to time market moves.

For retail investors: Understand that price movements are driven by underlying demand and supply. If you grasp these factors, you’ll make better decisions.

Summary: Why Understanding This Matters

No matter what investment method you use, the concept of demand and supply reflects the market’s buying and selling activity. It is the foundation for understanding how prices are formed. Once you understand this simple idea, price surges or drops will start to make sense, and you’ll be better prepared for future changes.