Supply and Demand: The Two Forces Driving the Financial Markets and the Differences Traders Need to Know

If you are a beginner investor in the stock market, you may have heard the terms “demand and supply” frequently. These two words may seem complicated, but in fact, they are fundamental principles that explain how prices move. Once you understand them, you’ll have a clearer perspective when making buy or sell decisions.

Demand and Supply: Basic Differences

Simply put, (Demand) is the desire to buy, while (Supply) is the desire to sell. Both move in opposite directions.

(Demand) is the quantity of goods that buyers want at various price levels. When prices decrease, consumers want to buy more. Why? Because your money becomes more valuable (Income Effect), and compared to other goods, the price is lower (Substitution Effect). Conversely, if prices rise, the desire to buy decreases. This is called the “law of demand.”

(Supply) is the quantity of goods that sellers are willing to offer at different price levels. Supply moves in the same direction as price. That is, if prices increase, sellers will produce or offer more, hoping for higher profits. Conversely, if prices fall, the desire to sell decreases. This is the “law of supply.”

This key difference shows that demand and supply move in opposite directions. When they meet, we call it the “(Equilibrium)” point.

Factors Driving Demand and Supply

Factors Influencing Demand

Demand is not solely dependent on price; other factors are involved, such as:

• Interest Rates: When the central bank lowers interest rates, borrowing becomes cheaper, encouraging more investment, which increases demand in the stock market.
• Income and Employment: If the economy grows and more people find jobs with higher income, they have more money to invest.
• Investor Confidence: Good news or positive outlooks boost confidence, leading to increased buying.
• Expectations: If investors expect prices to rise further, they rush to buy now.
• Market Demand: New products or trending companies can spike demand.

Factors Influencing Supply

The quantity of goods offered depends on:

• Production Costs: Lower costs enable producers to offer more.
• Technology: Advances can increase production efficiency or reduce costs.
• Company Policies: Share buybacks (Share Buyback) reduce the number of shares in circulation, while rights offerings (Rights Offering) increase supply.
• IPO Listings: New companies entering the market add to supply.
• Market Regulations: Rules or restrictions may limit the amount of shares that can be offered.

Equilibrium: Where Buyers and Sellers Meet

The equilibrium (Equilibrium Point) is where the demand and supply curves intersect. At this point, price and trading volume stabilize unless new factors intervene.

What happens when prices change?

• If price rises above equilibrium:

  • Supply exceeds demand (Excess Supply)
  • Buyers want less
  • Unsold inventory accumulates, prompting sellers to lower prices

• If price drops below equilibrium:

  • Demand exceeds supply (Excess Demand)
  • Sellers reduce the quantity offered
  • Scarcity drives prices up

This system causes prices to continually adjust toward equilibrium, including in the stock market.

Demand and Supply in the Stock Market

( 1. From Fundamental Analysis Perspective )Fundamental Analysis###

Stocks are securities representing a company’s value. When people believe a company will grow well, (demand) increases, pushing stock prices higher. Conversely, bad news (poor profits, reduced capacity) increases (supply) and puts downward pressure on prices.

Factors affecting demand in the stock market:

• Earnings and quarterly forecasts
• Overall economic growth
• Interest rate policies and liquidity conditions
• General market sentiment

Factors affecting supply:

• Company policies (Share buyback vs. capital increase)
• New listings
• Restrictions on large shareholders’ sales

( 2. From Technical Analysis Perspective )Technical Analysis###

Traders use various tools to observe buying and selling pressures:

Candlestick Patterns (Candle Stick)

• Green candle (Close above open): Buying strength, demand is high
• Red candle (Close below open): Selling strength, supply is high
• Doji (Open and close near the same level): Indecision, no clear trend

Price Trends (Market Trend)

• If prices keep making new highs: demand remains strong, upward momentum
• If prices keep making new lows: supply dominates, downward trend
• If prices fluctuate within a range: balance between buyers and sellers, waiting for new catalysts

Support & Resistance (Support & Resistance)

• Support: where demand (Buyers waiting to buy) prevents price from falling further
• Resistance: where supply (Sellers eager to sell) prevents price from rising further

Demand Supply Zone Technique: Applying the Concept to Trading

Many traders use Demand Supply Zones to identify entry points, divided into two cases:

( Case 1: Reversal Trading )Reversal###

Demand Zone - Drop Base Rally (DBR) [Long Entry]

• Price drops sharply (Drop) due to heavy supply
• Then price consolidates in a base (Base) as selling pressure eases and buying increases
• When good news comes out, price breaks above the base and rallies (Rally)
• Traders buy on breakout with stop-loss below the base

Supply Zone - Rally Base Drop (RBD) [Short Entry]

• Price rises rapidly (Rally) due to strong demand
• Then consolidates in a base (Base) as buying weakens and selling intensifies
• Negative news causes price to break below the base and fall (Drop)
• Traders sell on breakdown with stop-loss above the base

( Case 2: Trend Following Trading )Continuation###

Rally Base Rally (RBR) [Uptrend continuation]

• Price surges, then consolidates (Base)
• Buying resumes strongly, pushing price higher (Rally)
• Traders buy at the base to follow the trend

Drop Base Drop (DBD) [Downtrend continuation]

• Price drops sharply, then consolidates (Base)
• Selling pressure resumes, pushing price lower (Drop)
• Traders sell at the base to follow the downtrend

Leveraging the Difference Between Demand and Supply

Once you understand how demand and supply differ, you can better interpret market movements:

1. Good news: Demand surges, prices rise. You can go Long (buy).
2. Bad news: Supply floods the market, prices fall. Avoid or go Short (sell).
3. Consolidation: Price moves sideways, waiting for new catalysts. Watch trading volume.
4. Volume analysis (Volume): High volume indicates intense battle, signaling potential change.

Summary

Demand and supply are not just economic theories in textbooks; they are real forces driving daily market prices. Understanding their differences and relationships helps investors and traders evaluate prices, predict movements, and make better decisions.

The key is to apply this knowledge actively, not just read about it. Study actual market prices, observe how buying and selling pressures move. Doing so will turn demand and supply into powerful tools for your investing success.