Where do stock price fluctuations come from? Understand the laws of demand to forecast market direction.

Stock price observations each day show that it changes all the time. Some days it rises sharply, some days it drops rapidly. But have you ever asked yourself what causes these changes? The answer lies in a fundamental principle in economics called Demand and Supply, which not only explains price fluctuations but also serves as a powerful tool for investors to analyze and forecast future prices.

Demand and Supply: The Missing Piece of Market Understanding

What are Demand and Supply? Broadly, they are the buying and selling desires of market participants. But to understand more clearly, we need to separate these two concepts to see how they work.

Understanding Demand (Demand) First

Demand refers to the quantity of goods or services that buyers want to purchase at various prices. When plotting the relationship between price and quantity, we get the (Demand Curve), where each point on the curve shows how much buyers are willing to buy at a specific price.

The foundation of demand is the Law of Demand, which states that the relationship between price and quantity demanded is inversely related. That is:

• When the price increases, the quantity demanded decreases
• When the price decreases, the quantity demanded increases

This phenomenon arises from two effects:

Income Effect (Income Effect) When the price of a good changes, the real value of the buyer’s money also changes. For example, if the price drops, buyers feel they have more purchasing power (more money left after buying), so they are willing to buy more.

Substitution Effect (Substitution Effect) When prices change, buyers compare with other similar goods. For example, if Good A’s price drops more than Good B’s, buyers will prefer to buy more of A instead of B because it’s more cost-effective.

Besides price, other factors also influence demand:

• Consumers’ income
• Prices of substitute or complementary goods
• Tastes and preferences
• Number of consumers in the market
• Future price expectations
• Seasonal factors, psychological state of buyers, and government policies

Supply (Supply) is another side of the coin

Supply refers to the quantity of goods or services that sellers are willing to offer at various prices. Plotting this relationship yields the (Supply Curve), where each point indicates how much sellers want to sell at a given price.

The Law of Supply differs from the Law of Demand, stating that the relationship between price and quantity supplied is direct:

• When the price increases, the quantity sellers want to sell increases
• When the price decreases, the quantity they want to sell decreases

This occurs because higher prices mean higher profits, motivating producers to produce and sell more.

Other factors affecting supply include:

• Production costs
• Prices of alternative goods that can be produced
• Number of competitors
• Technological advancements
• Future price expectations
• External factors such as weather, tax policies, and access to funding

Equilibrium: The Price That Decides

In reality, market prices are not determined by just demand or supply alone but at the Equilibrium (Equilibrium) where demand and supply curves intersect. At this point:

• The quantity demanded equals the quantity supplied
• Price and quantity are relatively stable

The stability of equilibrium arises because:

When the price is above equilibrium: Sellers produce and offer more goods, while buyers demand less, leading to excess stock. This encourages sellers to lower prices until the market returns to equilibrium.

When the price is below equilibrium: Buyers want more goods, but sellers supply less, causing shortages. Buyers are willing to pay higher prices, pushing the price back up to equilibrium.

Demand and Supply in Financial Markets: How Do They Work?

In financial markets, the same principles apply, but the influencing factors are more complex.

Factors Driving Demand in the Stock Market

Macroeconomic factors such as GDP growth rate, inflation, and interest rates influence investment decisions. When interest rates are low, investors seek higher returns in the stock market, increasing demand.

Liquidity: The amount of money in the system determines how much investors can invest. More liquidity usually means higher demand.

Investor Confidence: Expectations about company performance, economic outlook, and overall conditions affect buying decisions. When the economy is strong, confidence is high, and demand increases.

( Factors Driving Supply in the Stock Market )

Corporate Policies: Decisions to raise capital or buy back shares directly affect supply. Issuing new shares increases supply; buybacks decrease it.

Initial Public Offerings (IPOs): New companies entering the market through IPOs add to the total securities available, impacting short-term price balance.

Regulations and Restrictions: Rules such as lock-up periods after IPOs ###Silent Period( influence supply.

Applying These Concepts to Stock Analysis

) Fundamental Analysis (Fundamental Analysis)

In this approach, stock prices are viewed as representations of the company’s market value ###Market Cap(. When news or data about the company improves, buyers are willing to pay higher prices, increasing demand and raising the price. Conversely, bad news leads to selling, increasing supply, and lowering the price.

) Technical Analysis )Technical Analysis(

Traders use various tools to infer demand and supply:

1) Candlestick Analysis (Candlestick Analysis): Green candles (closing higher than opening) indicate strong buying pressure, reflecting increased demand. Red candles (closing lower than opening) show strong selling pressure, indicating excess supply. Doji candles )open and close nearly the same( suggest indecision between buyers and sellers.

2) Trend Analysis )Trend Analysis(: If prices make new highs consistently, demand remains strong; prices tend to continue upward. If prices make new lows, supply dominates, and prices tend to fall further.

3) Support & Resistance ###Support & Resistance(: Support levels are price points where investors see value and are willing to buy, indicating demand strength. Resistance levels are where investors see prices as too high and are willing to sell, indicating supply strength.

Demand Supply Zone Trading: Actual Trading Strategies

A popular method is Demand Supply Zone, which identifies moments when the market loses balance and then quickly moves to find a new equilibrium.

) Reversal Trading (Reversal Trading)

DBR (Demand Zone Drop Base Rally): Occurs when prices fall sharply (indicating strong supply), then pause within a range (where both sides clash). When new news or factors favor demand, prices bounce back. Traders can buy at breakout above the range.

RBD (Supply Zone Rally Base Drop): Happens when prices rise sharply (indicating strong demand), then pause within a range ###where both sides clash(. When negative news hits, supply overtakes, and prices fall. Traders can sell at breakdown below the range.

) Trend Following Trading (Trend Continuation Trading)

RBR (Rally Base Rally): When prices surge, pause, then continue upward in a bullish trend, indicating demand remains strong.

DBD Drop Base Drop: When prices fall sharply, pause, then continue downward in a bearish trend, indicating supply remains strong.

Summary

The principles of demand and supply are not just economic theories for classrooms but are active in all markets and products, including stocks. By understanding how demand and supply work, investors can see what factors drive price movements and improve their planning. Whether through fundamental or technical analysis, this knowledge helps make more accurate and informed decisions.