How do stock prices move in the market: Understanding the demand and supply mechanism

Whether you are a beginner or an experienced investor, if you want to understand why stock prices fluctuate and how to forecast their direction, you need to understand one fundamental principle of economics: Supply and Demand. This concept is not as difficult as it seems and can be effectively applied to analyze financial markets.

Supply and Demand: Understanding the Core Concept

What is (Demand)?

Demand refers to the desire to purchase goods or services at various price levels. When we plot this data on a graph, we get the (Demand Curve), which shows the relationship between price and the quantity buyers want to receive.

The key rule of demand: The desire to buy is inversely related to price. If the price rises, people want to buy less. If the price drops, demand increases. There are two reasons for this:

Income Effect (Income Effect): When prices fall, the purchasing power of consumers increases, allowing them to buy more than before.

Substitution Effect (Substitution Effect): When the price of a certain good decreases, it becomes relatively cheaper than similar goods, prompting consumers to choose this good more often.

Besides price, demand is also influenced by other factors such as consumer income, prices of substitute goods, preferences, the number of buyers, future price expectations, and external factors like seasons, government policies, and new technologies that may diminish previous demand.

What is (Supply)?

Supply refers to the quantity of goods that sellers are willing to offer at various price levels. Plotting this data yields the (Supply Curve), which illustrates the relationship between price and the quantity sellers are willing to supply.

The key rule of supply: The willingness to sell is directly related to price. If the price increases, sellers want to supply more. If the price decreases, the supplied quantity decreases accordingly.

Factors affecting supply include production costs, prices of alternative goods that can be produced, the number of competitors, technology, future price expectations, as well as external influences like weather conditions, tax policies, exchange rates, and access to funding.

Equilibrium (: The point where price is set

Equilibrium is the point where the demand and supply curves intersect. At this point, the price and quantity tend to stabilize because there is a balance between buying and selling forces.

If the price rises above equilibrium, sellers want to sell more, but buyers want to buy less, leading to excess inventory, which puts downward pressure on the price.

If the price falls below equilibrium, buyers want to buy more, but sellers want to sell less, causing shortages and upward pressure on the price.

This mechanism is called the “invisible hand” of the market, working continuously to find a new equilibrium point.

Applying Supply and Demand in Financial Markets

) Main factors influencing demand in the stock market

In financial markets, stock demand mainly comes from investors who see stocks as an investment, not just a commodity.

Macroeconomic factors: Economic growth, inflation rates, and interest rates directly impact demand. When interest rates are low, investors seek higher returns in the stock market, increasing demand.

System liquidity: More circulating money often leads to increased investment in risky assets.

Investor confidence: Expectations about company performance, economic trends, and political situations influence investment decisions.

Main factors influencing stock supply

Corporate policies: Decisions to raise capital or buy back shares affect the total number of shares in the market. Buybacks reduce supply, while capital increases add to supply.

New IPOs: When companies go public, they add new securities to the market, which can impact short-term price equilibrium.

Regulations and rules: Stock exchange regulations may restrict major shareholders from selling shares after IPO, such as the Silent Period, affecting supply.

Relationships among factors

These factors do not operate in isolation but interact with each other. When the economy is strong, new companies may seek to list, increasing supply while demand also rises. Understanding these connections helps investors analyze the market comprehensively.

Using Supply and Demand to Analyze Stock Trends

Fundamental Analysis

Stock prices high or low mostly depend on buying and selling pressures. When prices rise, demand exceeds supply; when prices fall, supply dominates.

In fundamental analysis, investors look beyond natural trading forces to forecast company earnings, growth, and intrinsic value. Good news encourages buyers to pay higher prices, pushing prices up, while sellers wait, further increasing prices. Conversely, bad news causes buyers to hesitate and sellers to rush, driving prices down.

Technical Analysis

Candlestick ###Candlestick(: Green candles )Close higher than open( indicate strong demand. Red candles )Close lower than open( indicate strong supply. Doji candles )Open and close nearly equal( show market indecision and a balance of forces.

Trend )Trend(: If stocks make new highs consistently, demand remains strong, and the upward trend continues. If they make new lows, supply dominates, and prices decline.

Support & Resistance )Support & Resistance(: Support levels are where demand is waiting to buy, indicating perceived good entry points. Resistance levels are where supply is waiting to sell, indicating prices are considered high enough.

Price Charts and Trading Applications

) Demand Supply Zone: Timing the Market Reversals

The Demand Supply Zone technique involves identifying points where price loses balance and oscillates, signaling potential new equilibrium. It can be used in two ways:

1. Trading Reversals ###Reversal(

Demand Zone - Drop Base Rally )DBR(: When there is heavy selling, the price drops )Drop(. When the price reaches a low, buyers step in, causing a pause )Base(. If buying pressure wins, the price breaks out upward and reverses into an uptrend )Rally(. Traders can buy at the breakout point.

Supply Zone - Rally Base Drop )RBD(: When prices rise steadily )Rally( to high levels, sellers enter, causing a pause )Base(. If selling pressure wins, the price breaks downward and reverses into a downtrend )Drop(. Traders can sell at the breakout point.

) 2. Trading in the trend continuation ###Continuation(

Demand Zone - Rally Base Rally )RBR(: Price rises, pauses, then continues upward, indicating strong demand. Traders can follow these pauses for entries.

Supply Zone - Drop Base Drop )DBD(: Price drops, pauses, then continues downward, indicating heavy supply. Traders can follow these pauses for selling opportunities.

Key Point: Why Understanding Supply and Demand Matters

Honestly, without understanding these basic mechanisms, trading and investing are like walking in a dark maze. Fundamental analysis, candlestick reading, support and resistance—all must be connected back to supply and demand, which serve as tools to forecast where prices are headed next.

This understanding is not difficult if you study real market price movements. When you start to see, “Ah, this is heavy selling from supply” or “This is a sign that demand is recovering,” you are ready to trade with awareness.