Stock Price Fluctuations: The Secret of Demand and Supply in the Financial Market

When any investor decides to enter the stock market, the first concept to understand is Demand Supply – the factor that drives daily stock price movements. This science is not as difficult as it seems; it is a natural market mechanism.

Step 1: Understanding Demand and Supply

What is Demand

Demand (is the desire to buy) – the willingness of buyers to hold shares at various prices. When prices are low, buyers are willing to purchase more. When prices rise, demand decreases. This phenomenon is called the Law of Demand – the inverse relationship between price and quantity demanded.

The reasons are based on two factors:

• Income effect: Lower prices mean your money has more value, allowing you to buy more.
• Substitution effect: When a stock’s price drops, it looks more attractive compared to alternative investments.

Factors influencing Demand are not limited to price; they also include investors’ income, future expectations, market confidence, and news about the company.

What is Supply

Supply (is the willingness to sell) – the quantity of shares that holders are willing to sell at various prices. The mechanism of Supply is opposite to Demand: when prices rise, sellers are willing to sell more; when prices fall, they tend to hold back on selling.

The Law of Supply – a direct relationship between price and the quantity offered for sale.

Besides price, other factors affect Supply, such as production costs, the number of competitors, policies on capital increases or share buybacks by companies, and stock exchange regulations.

Equilibrium: The point where the market quiets down

The stock prices we see in the market are not determined solely by Demand or Supply but by the (Equilibrium) point – where buying and selling forces meet.

When prices are too high:

• Many sellers are willing to sell
• Buyers are eager to buy, facing difficulty
• Inventory ↓, prices adjust downward

When prices are too low:

• Buyers are eager to purchase
• Sellers delay selling
• Inventory shortage ↑, prices rise

This system is an automatic balance – the market finds its own optimal point.

Part 2: Demand Supply in Financial Markets – How is it different from the commodity market?

The stock market is more complex because the factors affecting Demand and Supply are diverse and interconnected.

Factors that increase Demand for stocks

• Low interest rates: When bank interest yields are low, investors turn to stocks for higher returns.
• Good news about the company: Strong earnings, market expansion, new contracts – most of these can be anticipated before the news is announced.
• System liquidity: When money flows into the trading system, people have more funds to invest.
• Market confidence: Depends on economic conditions, politics, and global situations.

Factors that increase Supply of stocks

• Company capital increases: Issuing new shares ↑ Supply
• New IPOs: Offering shares to the market ↑ Supply across the market
• Share buybacks: Reducing the number of shares in circulation ↓ Supply
• Investors fleeing the market: When panic sets in, many rush to sell simultaneously ↑ Supply

Part 3: How to use Demand Supply to make trading decisions

Investors often apply this concept in two ways:

1. Fundamental analysis

Use Demand Supply assessment to estimate the fair value of a stock:

• If the company’s fundamentals are good, Demand increases, and prices should rise.
• If the company faces problems, Supply will surge (as shareholders rush to sell), leading to price drops.
• Monitoring quarterly data, growth, cost structure helps forecast future Demand.

2. Technical analysis

Use price and volume to read market sentiment:

Candlestick Patterns

• Green (closes higher than open): Demand wins ↑ Price
• Red (closes lower than open): Supply wins ↓ Price
• Doji (opens and closes near the same level): Demand = Supply, unclear

Trend

• Higher highs: Strong Demand
• Lower lows: Strong Supply
• Range-bound movement: Demand = Supply, equilibrium

Support and Resistance

• Support: At lower prices, Demand is high (people are ready to buy)
• Resistance: At higher prices, Supply is high (people are ready to sell)

Part 4: Examples of using Demand Supply Zones in trading

The Demand Supply Zone technique involves identifying points where Demand or Supply is out of balance to predict reversals or continuations.

Reversal patterns

DBR (Demand Zone Drop Base Rally): Price drops sharply (Drop) → consolidates to form a base (Base) → then rallies back up (Rally)

• Signal: Buy on a breakout above the upper boundary of the base

RBD (Supply Zone Rally Base Drop): Price rises (Rally) → consolidates (Base) → then drops again (Drop)

• Signal: Sell on a breakout below the lower boundary of the base

Continuation patterns

RBR (Demand Zone Rally Base Rally): Continuous buying, consolidation, then upward move

• Signal: Buy when breaking above resistance after consolidation

DBD (Supply Zone Drop Base Drop): Continuous selling, consolidation, then downward move

• Signal: Sell when breaking below support after consolidation

Part 5: Key points for investors

1. Demand Supply is not the only indicator

It is fundamental, but should be combined with other factors such as news, macroeconomic conditions, and market confidence.

2. Factors influencing Demand or Supply are created anew every day

News, earnings reports, policy announcements – all these cause chart changes.

3. Demand Supply cannot predict the future 100%

It only shows current balance and its trend. Don’t believe it will go on forever.

4. The skill of reading Demand Supply

The more experience you have, the more accurately you can read the market.

Summary

Demand Supply is not a mystery; it is the basic rule of the market: when more people want to buy than sell, prices go up. Conversely, when more want to sell than buy, prices fall.

Investors who understand this mechanism can:

• More accurately predict price directions
• Better time their entries and exits
• Reduce risks from emotional decisions

All that’s needed is practice – observe real prices, real volume, real news, and learn how Demand Supply responds. Then, investing becomes not gambling but a decision based on principles.