Understanding Supply and Demand: Why Investors Need to Know This

In the investment world, the simplest yet most effective economic concept is studying how asset prices move and what factors drive their ups and downs. The answer to this question is demand and supply.

Basic Meaning: Buying and Selling Demand

Demand refers to the quantity of stocks or assets that investors want to buy at each price level. Supply is the number of stocks that current owners or sellers wish to sell at various prices.

At this point, one of the key concepts is the Law of Demand, which states that when prices increase, demand decreases, and when prices decrease, demand increases. This is mainly due to two reasons:

• Income Effect: When prices fall, the real value of your money increases, allowing you to buy more.
• Substitution Effect: When prices drop, this asset becomes more attractive compared to other goods.

Meanwhile, the Law of Supply tells us that when prices rise, sellers are willing to supply more, and when prices fall, fewer are willing to sell.

Factors Influencing Changes

Demand is not solely dependent on price. Other factors affecting demand include:

• Liquidity in the financial system and money supply
• Investor confidence in the future
• Earnings forecasts of companies
• Interest rates and monetary policy

Supply is influenced by:

• Company policies on capital increases or share buybacks
• New IPOs of companies
• Stock exchange regulations and requirements
• Production costs and capacity expansion

Equilibrium: The Point of Price Stability

Equilibrium is the point where demand and supply curves intersect. This is the price level at which the market can sustain itself and is unlikely to change unless new factors intervene.

When prices are above equilibrium, supply exceeds demand, prompting sellers to lower prices. When prices are below equilibrium, demand exceeds supply, leading buyers to be willing to pay higher prices. Ultimately, prices tend to revert to the equilibrium point.

Application in Stock Price Analysis

( Fundamental Analysis

Investors use demand and supply to understand why stock prices fluctuate. When good news arrives, demand increases )people want to buy more###, and prices go up. When bad news occurs, more people want to sell (supply increases), and prices fall.

Factors affecting demand and supply include:

• Earnings forecasts for each quarter
• Economic conditions impacting company growth
• Changes in business structure affecting profits

( Technical Analysis

Traders use various tools to identify points where demand and supply are out of balance:

1. Candlestick Patterns )Candlestick###

• Green candlestick (closes higher than open) indicates strong demand, buyers control the market
• Red candlestick (closes lower than open) indicates strong supply, sellers control the market
• Doji candlestick (opens and closes near the same level) shows tension between both sides

2. Price Trends (Market Trend)

• If prices make new highs, demand remains strong
• If prices make new lows, supply remains heavy
• If prices move within a range, both sides have equal strength

3. Support & Resistance (Support & Resistance)

• Support is where buyers are waiting (demand to buy)
• Resistance is where sellers are waiting to sell (supply to sell)

Examples of Demand Supply Zone Trading

Reversal Patterns:

1. Demand Zone Drop Base Rally (DBR) - When prices plunge sharply and then pause within a range (due to buyers stepping in), followed by a rally. This signals a buy.

2. Supply Zone Rally Base Drop (RBD) - When prices spike and then pause, followed by a decline. This signals a sell.

Continuation Patterns:

1. Rally Base Rally (RBR) - Strong demand, prices rise, pause, then continue upward.

2. Drop Base Drop (DBD) - Strong supply, prices fall, pause, then continue downward.

Key Reminders for Investors

Demand and supply are not just basic economic concepts or distant theories but practical tools that explain why stock prices change.

Understanding and applying these concepts can help investors:

• Better predict price directions
• Find good entry and exit points
• Manage risks effectively

However, true success comes from practicing these ideas on real asset prices, comparing them with meaningful figures to gain clearer insights.