What does demand mean? Why do investors need to understand this concept to forecast stock prices?

When it comes to “demand,” many investors think it’s just an economics term far from investment decisions. But in reality, demand refers to the market’s desire to buy assets. When you understand this concept along with supply, you’ll see that stock prices don’t happen randomly but are driven by balanced buying and selling forces.

Understanding: What is demand and why is it important to price

Demand refers to the quantity of goods or assets that buyers want to acquire at various prices. When we plot this demand on a graph, we get the demand curve, which shows the inverse relationship between price and quantity: the lower the price, the greater the quantity buyers want, and vice versa.

Supply refers to the quantity of goods or assets that sellers want to put into the market at different prices. The relationship of supply is in the same direction as price: the higher the price, the more sellers want to sell.

Most importantly, the equilibrium point is where the demand and supply curves intersect. At this point, prices tend to stabilize because demand and supply are in balance.

The mechanism behind price changes: income effects and substitution effects

When prices change, the variation in demand isn’t caused by a single reason but by two main effects:

Income Effect: When stock prices fall, buyers feel their purchasing power increases—that is, their money can buy more. Therefore, they want to buy more. Conversely, when prices rise, buyers feel poorer and want to buy less.

Substitution Effect: When a stock’s price decreases relative to other stocks, investors tend to switch from more expensive stocks to this cheaper one, increasing demand.

Key factors driving demand in the financial markets

Investors should monitor these four main factors, as each can quickly change price trends:

1. Macroeconomic conditions: When interest rates are low, investors are less inclined to hold cash and prefer buying stocks for returns, increasing demand and pushing prices higher.

2. Liquidity: An increase in the money supply in the system means investors have more cash available for investment.

3. Investor confidence: Positive news about economic growth encourages investors to buy stocks even at higher prices.

4. Technology development and policies: New technologies that add value to companies or government policies supporting businesses can boost demand for stocks.

Key factors driving supply in the financial markets

On the seller side, several important factors include:

1. Production costs: When production costs rise, companies are less willing to issue new shares at the same price, reducing supply.

2. Corporate policies: Share buybacks decrease supply, while issuing new shares increases supply.

3. Competition: When new companies go public via IPO, the overall supply of securities in the market increases.

4. Future price expectations: If shareholders expect prices to rise further, they will hold back from selling (reducing selling pressure). Conversely, if they expect prices to fall, they will sell more.

How fundamental analysts use demand and supply

Fundamental investors don’t just look at stock prices but see them as representations of a company’s market value (Market Cap). When factors affecting the company’s profitability change—such as increased revenue growth expectations—investors become more eager to buy (demand increases) and are willing to pay higher prices, causing stock prices to rise.

Conversely, if news suggests the company will incur losses later this year, investors will want to reduce their holdings (demand decreases) and are willing to sell at lower prices, leading to a price drop.

Technical analysis techniques: reading demand and supply signals

Technical traders use various tools to measure demand and supply:

1. Candlestick analysis: Green candles (close > open) indicate buying (demand) dominance, while red candles (close < open) indicate selling (supply) dominance.

2. Trend analysis: If prices make new highs consistently, demand remains strong. If prices make new lows, supply remains strong.

3. Support and resistance levels: Support is a price level with enough demand to halt declines; resistance is a level with enough supply to halt advances.

Demand Supply Zone techniques: real trading examples

Practitioners often use Demand Supply Zones, which are divided into two approaches:

Reversal trading

Demand Zone Drop Base Rally (DBR): Stock price drops sharply due to high supply (Drop), then stabilizes in a base as buyers start entering, causing sideways movement. When positive news arrives, demand strengthens, breaking above the base and rallying upward—an entry point.

Supply Zone Rally Base Drop (RBD): Price rises sharply due to strong demand (Rally), then consolidates in a base as sellers start offering more. Negative news causes supply to strengthen, breaking below the base and dropping—an entry point for selling.

Trend-following trading

Demand Zone Rally Base Rally (RBR): Price steadily rises with strong demand, pauses briefly during resistance, then continues upward—trading in an uptrend.

Supply Zone Drop Base Drop (DBD): Price steadily declines with strong supply, pauses during resistance, then continues downward—trading in a downtrend.

When demand means: what investors must remember

Demand isn’t just about the desire to buy; it’s a bridge connecting economic theory with real-world investment decisions.

Whether you’re a long-term investor using fundamental analysis or a trader employing technical analysis, understanding demand and supply helps you see the direction of stock movements and the reasons behind them.

Finally, continuous practice and study are essential: analyze real price charts, observe trends and turning points, identify influencing factors, and gradually build your experience in reading the market.