Why do stock prices move? Understanding Demand and Supply in the financial market

Many investors wonder why stock prices constantly go up and down, and whether it is possible to predict these movements. The answer is demand is the desire to buy and supply is the desire to sell. These two factors are the fundamental forces that drive all price movements in the market.

Why is it important to understand Demand and Supply?

In the financial markets, asset prices do not float aimlessly; they are driven by the fundamental forces of demand and supply that are constantly interacting.

When buyers outnumber sellers, prices will rise because buyers are willing to pay higher to acquire assets. Conversely, when sellers outnumber buyers, prices will fall because sellers are willing to lower prices to find buyers.

This is the mechanism that has operated in financial markets for decades. If investors can read demand and supply well, they have a better chance of timing their trades effectively.

What is Demand? Why is it important for investing?

Demand is the desire to buy at various price levels. When we plot this relationship on a graph, we get the Demand Curve sloping from the top-left to the bottom-right.

( Basic Rules of Demand

The Law of Demand states that when prices decrease, the quantity demanded increases; when prices increase, the quantity demanded decreases. This occurs for two main reasons:

Income Effect ()Income Effect(): When prices fall, consumers’ purchasing power increases or becomes more efficient. Whether it’s stocks or other assets, people can buy more.

Substitution Effect ()Substitution Effect###): When the price of one asset drops, people tend to stop buying other assets and switch to the cheaper one, as it appears more cost-effective.

( Factors affecting Demand in the market

• Price – the primary factor directly influencing demand
• Investors’ income – higher income encourages more investment
• Prices of related assets – if crypto prices rise, some may switch to stocks
• Market expectations – if people expect prices to rise, they are willing to buy now
• Number of new investors entering the market – more new investors increase demand
• Market confidence and sentiment – good news boosts demand; bad news reduces it

What is Supply? How does it relate to price?

Supply is the quantity of assets offered by sellers at various price levels. When plotted, it forms the Supply Curve sloping from the bottom-left to the top-right, opposite to demand.

) Law of Supply

The Law of Supply states that when prices increase, sellers are more willing to offer more because they seek higher profits. Conversely, when prices decrease, sellers prefer to hold onto their assets rather than sell at lower prices.

( Factors influencing Supply in the market

• Production or acquisition costs – higher costs lead sellers to sell to maintain supply
• Number of sellers – new companies IPOing increase the total supply
• Technology – improved technology can reduce costs, increasing supply
• Corporate policies – issuing new shares or buybacks affect supply
• Future price expectations – if prices are expected to rise, sellers may hold assets instead of selling

What is Equilibrium? ()Dul-yu-pha###) — What does it mean?

The point where the Demand and Supply curves intersect is called Equilibrium. At this point, the quantity consumers want to buy equals the quantity sellers want to sell.

The equilibrium price is called the Market Price — the natural price of the market driven by supply and demand forces.

( Why is Equilibrium important?

• If the price is above Equilibrium: Sellers flood the market with supply, but buyers are few, leading to excess inventory. Prices are pushed back down to equilibrium.
• If the price is below Equilibrium: Demand exceeds supply, leading to shortages. Prices tend to rise back to equilibrium.

In essence, the equilibrium price tends to be stable because market forces always push prices toward this point.

Demand and Supply in the financial markets — Factors that determine asset prices

) Factors increasing Demand in the stock market

1. Strong economy – growth increases corporate profits, encouraging investors to buy more stocks
2. Low interest rates – lower deposit rates make stocks more attractive for higher returns
3. High liquidity – abundant money in the system flows into the stock market
4. Good news about companies – profit increases, new products, partnerships boost demand
5. Market confidence – low VIX (volatility index) indicates investor willingness to take risks and invest

Factors increasing Supply in the stock market

1. New IPOs – each new IPO adds shares to the market
2. Additional capital raising by companies – new offerings increase total shares
3. Major investors selling off – lock-up periods ending or declining confidence lead large shareholders to sell
4. Bad news about companies – profit declines or negative outlooks cause shareholders to sell, increasing supply
5. Investor fear – market worries cause shareholders to rush to sell, flooding the supply

How to read buy and sell pressure? What tools to use?

1. Price Action and Candlesticks

Green candlestick (Close > Open) = Buying pressure dominates that day, meaning demand > supply

Red candlestick ###Close < Open### = Selling pressure dominates that day, meaning supply > demand

Doji candlestick ###Close ≈ Open### = Equal buying and selling pressure, price is indecisive

( 2. Support and Resistance

Support = Price level where many buyers are waiting, demand is thick, preventing further decline

Resistance = Price level where many sellers are waiting, supply is thick, preventing further rise

) 3. Trend

• Uptrend (Bullish) = Higher highs and higher lows, demand remains strong
• Downtrend (Bearish) = Lower lows and lower highs, supply remains strong
• Sideways ###Range-bound### = Demand ≈ Supply, price moves sideways

Trading Demand and Supply — Demand Supply Zones

A popular technique is Demand Supply Zone, which relies on reading Price Action.

( Types:

1. Drop-Base-Rally (DBR) — Positive reversal point

Price drops sharply )Drop( with excess supply → then consolidates in a )Base( → when demand returns strongly, price breaks out upward to )Rally###

Trading method: Enter buy orders at breakout above the zone, with a Stop Loss below the Base point.

2. Rally-Base-Drop (RBD) — Negative reversal point

Price surges (Rally) with excess demand → then consolidates in a (Base) → when supply becomes strong again, price breaks down below to (Drop)

Trading method: Enter sell orders at breakdown below the zone, with a Stop Loss above the Base.

3. Rally-Base-Rally (RBR) — Continuation upward

Price surges (Rally), then consolidates in a ###Base(, and demand returns strongly, pushing price higher to another )Rally(

Trading method: Buy at breakout above the zone, following the uptrend.

4. Drop-Base-Drop (DBD) — Continuation downward

Price drops sharply )Drop(, consolidates in a )Base(, then supply returns strongly, pushing price lower to another )Drop###

Trading method: Sell at breakdown below the zone, following the downtrend.

Tips from professional traders

1. Practice with real charts first — Review 6 months of data; Support and Resistance often behave this way.

2. Don’t rush into reversals — Wait for price to break the zone before entering, avoid guessing too early.

3. Always set Stop Loss — Demand and supply can change quickly; protect your position.

4. Observe volume ((Volume)) — Breakouts with high volume are more reliable.

5. Combine with other tools — Don’t rely solely on Demand and Supply; use MA, RSI, MACD for confirmation.

In summary

Demand is the desire to buy, and Supply is the desire to sell. Both work together to determine price. When demand > supply, prices go up; when supply > demand, prices go down.

Investors who understand demand and supply well can better time their trades and avoid market traps. Next time you see a big candlestick within a zone, consider whether it’s creating a Demand Supply Zone for a reversal or continuation of the trend.