## When Will Stock Prices Rise? When Will They Fall? The Law of Supply and Demand Provides the Answer

If you've ever wondered why stock prices move and what causes these changes, the answer lies in the law of supply and demand, one of the fundamental principles of economics that plays a role in setting prices in both commodity markets and financial markets. Investors who understand this law well can analyze stock and asset price movements more intelligently.

## Before Investing, Know the Concepts of Supply and Demand

In the simplest terms, demand is the desire to buy, while supply is the desire to sell. When traders and investors deeply understand these two concepts, they can predict where stock prices are headed next. Let’s study each part in detail.

### Demand ( and the governing rules

**Demand** refers to the quantity of goods or services that buyers want to purchase at various price levels. When we plot the relationship between price and the quantity demanded on a graph, we get a downward-sloping curve called the **demand curve**, which shows that the higher the price, the less quantity buyers want, and vice versa.

**The Law of Demand** states that there is an inverse relationship between demand and price. As the price increases, the quantity demanded decreases; as the price decreases, the quantity demanded increases.

This relationship results from two effects: the **Income Effect** )Income Effect( — when prices fall, buyers have more purchasing power; and the **Substitution Effect** )Substitution Effect( — when prices fall, this good appears cheaper than alternatives, prompting more purchases.

Besides price, demand is influenced by other factors such as consumers’ income, tastes, future price expectations, the number of consumers, and technological changes.

) Supply ### and how it works

**Supply** refers to the quantity of goods or services that sellers are willing to offer at various price levels. When we plot this relationship on a graph, we get an upward-sloping curve called the **supply curve**, indicating that higher prices motivate sellers to supply more.

**The Law of Supply** states that there is a direct relationship between supply and price. As the price increases, sellers are willing to supply more; as the price decreases, the quantity supplied drops.

Supply also depends on factors such as production costs, technological development, government policies, and future price expectations.

( Equilibrium Point - Where Prices Stabilize

Demand and supply alone cannot determine the actual price. The real price occurs at the **equilibrium point**, where the demand and supply curves intersect. At this point, the quantity buyers want to purchase equals the quantity sellers want to sell.

At the equilibrium point, prices tend to stabilize because if the price rises above this point, excess supply occurs, forcing sellers to lower prices. Conversely, if the price falls below this point, excess demand occurs, encouraging buyers to pay higher prices.

## Financial Markets: Where the Law of Supply and Demand Comes to Life

In financial markets, stocks and other assets are also commodities. Therefore, the law of supply and demand applies here as well.

**Factors driving demand in financial markets:**
- Macroeconomic conditions: When interest rates are low, investors often seek higher returns in the stock market.
- Market liquidity: When more money flows into the market, demand for stocks increases.
- Investor confidence: Good news, strong earnings, or positive forecasts boost demand.

**Factors affecting supply in financial markets:**
- Corporate decisions: Capital raising or share buybacks influence the number of shares available.
- IPOs of new companies: Increase the total securities in the market.
- Regulations: Legal restrictions impact the offering of securities.

## Stock Prices in Terms of Buying and Selling Pressure

When we observe stock price movements, what we are really seeing is the market’s valuation of the company )Market Cap### at different times.

**From a fundamental perspective**, factors such as projected earnings, business growth, or strategic changes influence the number of investors wanting to buy (demand) or interested in selling (supply).

**From a technical perspective**, traders use various tools to analyze the balance of supply and demand, such as:

- **Price Action and Candlesticks**: Green candles (close higher than open) indicate strong demand; red candles (close lower than open) indicate supply pressure.
- **Price Trends**: Making new highs suggests strong demand; making new lows indicates supply dominance.
- **Support and Resistance Levels**: Support is where buying interest is concentrated; resistance is where selling interest is strong.

## Demand Supply Zone Technique - A Tool for Traders to Catch the Moment

**Demand Supply Zones** combine supply and demand concepts with technical analysis to precisely time entries and exits.

**Pattern 1: Reversal (Reversal)**
- **DBR (Drop Base Rally)**: Price drops (Drop), then forms a base (Base) before reversing upward (Rally). Traders can buy on breakout above the resistance.
- **RBD (Rally Base Drop)**: Price rises (Rally), then forms a base (Base) before reversing downward (Drop). Traders can sell on breakdown below support.

**Pattern 2: Continuation (Continuation)**
- **RBR (Rally Base Rally)**: Price continues upward in an uptrend, forming a temporary base before further rise.
- **DBD (Drop Base Drop)**: Price continues downward in a downtrend, forming a base before further decline.

## Applying the Law of Supply and Demand in Practice: Tips for Investors

1. **Observe Trading Volume Changes**: When volume increases along with price movement, it indicates genuine momentum.
2. **Follow News**: Good news boosts demand; bad news increases supply. Understanding market context helps you prepare.
3. **Look Beyond Price**: Price is not just a number; it reflects market valuation.
4. **Practice**: Theory alone isn’t enough; analyze real price data to see the full picture.

## Summary

The **law of supply and demand** is not just an economic theory in textbooks but the fundamental driver of daily price movements in financial markets. Investors who understand and can apply this law gain an advantage in analysis and decision-making, whether using technical or fundamental approaches. Both methods point to one core insight: understanding market dynamics.