Why are supply and demand the key to investing in the stock market

When it comes to investing in the stock market, many still think it’s complicated. But in reality, the fundamental basics are very simple—demand and supply. These two factors not only determine the prices of goods in the general market but also serve as the main drivers of stock price changes and overall financial asset fluctuations.

Buying and Selling Demand: The Foundation of Economics

Demand is not complicated; it simply refers to the desire to purchase goods or services at various price levels. When plotted on a graph showing the relationship between price and quantity, it produces the demand curve, which tells us: at different prices, how much consumers are willing to buy.

Conversely, supply is the desire to sell goods or services at various price levels. The supply curve shows how much producers or sellers are willing to offer at each price point.

Basic rule: inverse relationship and same direction

Law of Demand states that when prices rise, the quantity demanded decreases; when prices fall, demand increases. This is driven by two factors:

• Income effect: When prices drop, your purchasing power increases, allowing you to buy more.
• Substitution effect: When one product becomes cheaper, people tend to buy that instead of other products.

Law of Supply works oppositely—when prices rise, sellers are willing to supply more because profits increase; when prices fall, their interest in selling diminishes.

Factors affecting demand

• Price level
• Consumer income
• Prices of substitute goods
• Tastes and preferences
• Number of buyers in the market
• Future price expectations

External factors such as seasons, government policies, technological developments, and consumer confidence also influence demand.

Factors affecting supply

• Price level
• Production costs
• Prices of alternative goods that can be produced
• Number of competitors
• Technological advancements
• Future price expectations

Weather, tax policies, exchange rate volatility, and access to funding sources also impact supply.

Price Equilibrium: The Point Where Both Sides Meet

When demand equals supply, the price and quantity reach the equilibrium point. This is the market balance point.

If the price is above equilibrium:

• Sellers want to sell more
• Buyers want to buy less
• Surplus occurs, pushing prices down

If the price is below equilibrium:

• Buyers want to buy more
• Sellers want to sell less
• Shortage occurs, pushing prices up

Demand and Supply in the Financial Market

In the stock market, demand and supply operate similarly to the general goods market but are more complex.

Factors driving demand in the financial market

Macroeconomic conditions: When interest rates are low, investors seek higher returns in the stock market, increasing demand and raising stock prices.

Money liquidity in the system: More money means more funds available for investment.

Investor confidence: If economic prospects look good, companies are expected to profit more, encouraging more stock purchases.

Factors driving supply in the financial market

Decisions to raise capital or buy back shares: Companies repurchasing shares reduce supply; those issuing new shares increase supply.

Initial Public Offerings (IPOs): New companies entering the market add to supply.

Regulations and requirements: Restrictions on share sales, such as the Silent Period, affect supply.

How Investors Use Demand and Supply to Their Advantage

( From a fundamental analysis perspective

Stock prices change because of shifts in demand and supply. Investors observe that:

• Price rises = buying pressure wins = demand exceeds supply
• Price falls = selling pressure wins = supply exceeds demand

Factors causing demand or supply to change include earnings forecasts, company growth, or structural changes affecting profits.

) From a technical analysis perspective

1( Candlestick analysis:

• Green candlestick )Close price higher than open### = demand wins = be cautious when investing
• Red candlestick ###Close price lower than open) = supply wins = price may continue to decline
• Doji (Open and close prices are equal) = balance of forces = wait for new signals

2( Trend observation:

• Prices making new highs = strong demand
• Prices making new lows = strong supply
• Price within a range = equilibrium, no clear trend

3) Support and resistance levels:

• Support = demand zone where buyers are waiting = price should not fall below
• Resistance = supply zone where sellers are waiting = price should not rise above

Using Demand and Supply Zones to Time Trades

Demand Supply Zone is a trading technique that uses demand and supply principles to identify entry and exit points.

( Case 1: Price Reversal )Reversal)

Drop Base Rally )DBR### - Bullish reversal:

• Price drops sharply (Drop) due to excess supply
• Price consolidates in a range (Base) as selling slows and buying increases
• Price reverses upward (Rally) when positive factors emerge
• Traders buy at breakout points above the range

Rally Base Drop (RBD) - Bearish reversal:

• Price rises sharply (Rally) due to excess demand
• Price consolidates in a range (Base) as buying slows and selling increases
• Price reverses downward (Drop) when negative factors appear
• Traders sell at breakout points below the range

( Case 2: Continuation of trend )Continuation(

Rally Base Rally )RBR### - Uptrend continuation:

• Price rises strongly as demand wins
• Small pullbacks occur but demand remains strong
• Price continues upward (Rally)
• Trend-following traders enter on the trend

Drop Base Drop (DBD) - Downtrend continuation:

• Price declines sharply as supply wins
• Small rebounds occur but supply remains strong
• Price continues downward (Drop)
• Trend-following traders short on the trend

Why Investors Should Understand Demand and Supply

Whether you’re a fundamental analyst (thinking about company profits) or a technical trader (reading charts), the principles of demand and supply are unavoidable.

When you understand that:

• Price movements are driven by buying and selling forces
• Changes in factors affecting demand and supply
• How to observe shifts from price and volume

You can make better investment decisions and more accurately time your buy and sell actions.

Summary

Demand and supply are not just abstract economic theories; they are practical tools that explain why stock prices go up or down. Learning to observe and leverage these principles makes investing more rational. Instead of relying on luck, your investment approach becomes more reasoned and strategic. Continuous study and practical application of these concepts are essential for success.