What causes stock prices to fluctuate? Understanding supply and demand makes it easier to predict the direction of prices.

Why do stock prices go up or down? The answer lies in a fundamental concept called supply and demand, which is not new in economics but is a crucial mechanism that drives the prices of all assets in the financial markets, including the stocks we trade today. Here, we will delve into what supply and demand are and how investors can use this concept to forecast prices.

Supply and Demand: The Market Basics Everyone Should Know

In any market, prices are set through the interaction of two forces: people who want to buy (demand) and people who want to sell (supply).

Demand is the quantity of goods or stocks that buyers want to own at various prices. Often, when prices fall, more people want to buy because lower prices increase the relative value of their money (income effect), and stocks become more attractive compared to other goods (substitution effect). Conversely, if prices rise, buyers tend to hold back on purchasing.

Supply is the quantity of goods or stocks that sellers are willing to release at different prices. The general rule is that higher prices motivate more sellers to sell because they get better returns, while lower prices may reduce their willingness to sell.

Factors affecting demand in financial markets

• Macroeconomic conditions: When interest rates are low, investors seek higher returns in the stock market, boosting demand. Conversely, when interest rates are high, funds may flow into loans or bonds instead.
• Market liquidity: If more money flows into the system, the demand for risky assets often increases.
• Market confidence: When investors believe the economy will improve or companies will be profitable, demand increases.

Factors affecting supply in financial markets

• Corporate decisions: When companies issue new shares, supply increases. When they buy back shares, supply decreases.
• New listings: IPOs add to the supply of securities.
• Legal regulations: Market rules can restrict or facilitate share sales.

Price Equilibrium: The Point of Agreement

The actual market price is where demand and supply meet, called equilibrium (Equilibrium). At this point, the quantity buyers want to purchase matches the quantity sellers want to sell.

What’s interesting is: why doesn’t the price stay fixed?

• If the price rises above equilibrium, sellers want to sell more, but buyers hold back, leading to excess supply until the price drops back to equilibrium.
• If the price falls below equilibrium, buyers want to buy more, but sellers are less willing to sell, causing shortages until the price rises back to equilibrium.

This mechanism is known as the invisible hand (Invisible Hand) of the market.

From Theory to Practice: Using Supply and Demand to Forecast Stock Prices

Ultimately, stocks are just another commodity, so they follow the laws of supply and demand. Investors can interpret market forces through various methods:

Fundamental analysis: Price reflects intrinsic value

Investors often see stocks not just as tradable assets but as ownership in a business. Factors influencing demand include:

• Earnings forecasts: If a company expects higher profits next quarter, demand for its stock increases, pushing the price up.
• Economic outlook: If the economy is expected to grow, companies tend to be more profitable, increasing demand.
• Structural changes: Announcements of improvements that boost revenue potential increase confidence and demand.

Conversely, negative news can cause buyers to hold back and sellers to rush to exit, lowering prices.

Technical analysis: Reading market sentiment through charts

Various technical tools help us see actual supply and demand:

Candlestick charts (Candle Stick):

• Green candles (close higher than open) indicate strong buying pressure, suggesting prices may continue upward.
• Red candles (close lower than open) indicate strong selling pressure, suggesting prices may decline.
• Doji (open equals close) shows indecision between buyers and sellers.

Price trends (Trend):

• Rising highs and higher lows suggest strong demand.
• Falling lows and lower highs suggest strong supply.
• Sideways movement indicates balance.

Support & Resistance (Support & Resistance):

• Support = price level where buyers believe the stock is attractive and are waiting to buy.
• Resistance = price level where sellers believe the stock is expensive and are willing to sell.

Demand and Supply Zones: Practical Trading Techniques

Modern trading techniques include identifying Demand and Supply Zones based on these principles:

Pattern 1: Reversal (Reversal)

Demand Zone Drop Base Rally (DBR): Price drops sharply (Drop), consolidates in a base (Base), then moves higher (Rally).

• Traders enter when the price breaks above the zone.

Supply Zone Rally Base Drop (RBD): Price rallies strongly (Rally), consolidates (Base), then drops (Drop).

• Traders enter when the price breaks below the zone.

Pattern 2: Trend continuation (Continuation)

Rally Base Rally (RBR): Price rises, consolidates briefly, then continues upward.

• Used when demand remains strong.

Drop Base Drop (DBD): Price falls, consolidates, then continues downward.

• Used when supply remains strong.

Summary

Supply and demand is not just an economic theory but the language of the market. Both short-term traders and long-term investors use this principle to analyze and forecast stock prices. Deep understanding comes from observing real market movements—every day, every move tells a story of supply and demand forces. The more you practice reading these signals, the better you become at predicting market directions.