## How Do Stock Prices Move? The Legend of Supply and Demand Explained

Everyone who trades stocks knows the phrases "borrowing stocks and the price goes up" or "pushing the price higher," but what do supply and demand really mean, and how do they cause prices to change? In fact, these concepts originate from basic economics, which can accurately explain the movement of asset prices.

## Supply and Demand Are the Buying and Selling Interests in the Market

Simply put, **supply and demand refer to** the quantities of goods that people want to buy and sell at different price levels. When applying this idea to the stock market, it means the number of buyers and sellers of shares, which can flip the price entirely.

Imagine if more people want to buy stocks continuously, but sellers are reluctant to sell because they believe prices will rise further. Buyers then have to pay higher prices to acquire the shares. This is **supply and demand** driving the price. Conversely, if there are too many sellers and fewer buyers, sellers must lower their prices to find buyers.

## The Strange Relationship Between Price and Quantity Demanded

**Demand (Demand)** — The lower the price, the more people want to buy. This is because, as prices decrease, the real value of money for buyers increases (they have more money left), enabling them to purchase more goods. Additionally, those who previously used other products might switch to this cheaper product when compared.

Other factors influencing demand include buyers’ income, tastes, the number of consumers, and expectations about future prices, as well as external factors like economic downturns, negative or positive news from companies.

**Supply (Supply)** — The higher the price, the more sellers want to sell because higher prices mean higher profits. Conversely, if prices fall, the desire to sell decreases.

Other factors affecting supply include production costs, prices of substitute goods, the number of competitors, technology, future price expectations, weather and natural disasters, tax policies, and access to funding.

## Equilibrium Is Where Prices Set Themselves

Most importantly, **supply and demand refer to** the origin of price. When the supply and demand curves intersect, the price at that point is stable and unlikely to change. This is called **equilibrium** (Equilibrium).

Why is that? Think of it this way: if the price rises above the equilibrium point, sellers want to sell more, but buyers reduce their demand because prices are higher, leading to excess inventory. Eventually, prices must fall back to restore balance.

Conversely, if the price drops below equilibrium, buyers want to buy more, but sellers reduce their willingness to sell, causing shortages. The increased demand pushes prices back up to restore equilibrium naturally.

## Supply and Demand in Financial Markets Are More Complex

In the stock market, demand is affected by many factors: macroeconomic conditions such as economic growth, inflation rates, interest rates, liquidity in the system, and investor confidence about the future. The better the economy and the more robust the confidence, the higher the demand.

Supply depends on corporate decisions like issuing new shares or share buybacks (IPO), which increase supply, and market regulations such as restrictions on selling shares after an IPO.

## Traders Use **Supply and Demand** in Analysis

Traders and investors apply this concept in two main ways: **fundamental analysis** — examining news, company earnings, and growth prospects that can change supply or demand; and **technical analysis** — studying candlestick patterns, trends, support & resistance levels to gauge buying and selling strength.

A green candlestick (closing price higher than opening) indicates strong demand, while a red candlestick (closing price lower than opening) shows strong supply. Doji candles (opening and closing prices are equal) suggest a balance of forces on both sides.

## Example of Applying Demand and Supply Zones in Trading

Demand Supply Zone techniques are popular for timing trades by identifying points where price loses balance and tends to oscillate, seeking a new equilibrium.

**Demand Zone Drop Base Rally (DBR)** — Price drops sharply due to excessive selling, then consolidates in a range (forming a base). As selling pressure eases and positive news emerges, prices surge past the upper boundary, making this breakout point ideal for entry with a stop-loss.

**Supply Zone Rally Base Drop (RBD)** — Price rises quickly due to strong buying, then consolidates. When bad news hits, prices fall through the lower boundary, presenting a short-selling opportunity.

Beyond reversals, trend continuation patterns include **Rally Base Rally (RBR)**, where prices rise, pause, then continue upward, and **Drop Base Drop (DBD)**, where prices fall, pause, then continue downward, suitable for trend-following trades.

## Summary

**Supply and demand refer to** the fundamental forces driving prices in both general economics and financial markets. Economists, traders, and investors all use this concept to forecast prices. Understanding supply and demand is fundamental, but to use it effectively, one must practice and apply it in real markets to gain a clearer and deeper insight.