Why understanding supply and demand: The key for investors

Investors often get stuck with the question, “Why do stock prices go up and down?” The answer is not as complicated as you might think—it’s a game between buyers and sellers that occurs in the financial markets. Once you understand this mechanism, you’ll be able to predict price directions and time your investments more accurately. This article will introduce you to supply and demand—both the theoretical concept and practical applications in stock trading.

First: What exactly are supply and demand?

Demand (Demand) refers to the quantity of goods or services that buyers want at different prices. Meanwhile, Supply (Supply) is the amount that sellers are willing to offer at various prices. When both move until they meet at the same point, the price and quantity at that point are called Equilibrium (Equilibrium)—a “fair” price accepted by the market.

When moving away from this equilibrium, the market always has mechanisms to return to balance:

• If the price rises above equilibrium, sellers want to sell more, but buyers will buy less, leading to excess supply and a downward pressure on price.
• If the price falls below equilibrium, buyers want to buy more, while sellers reduce their offerings, leading to a shortage and upward pressure on price.

Common misconceptions about supply and demand

Many investors think, “Stocks will rise because the company is strong,” but the truth is: Stocks go up because there are more buyers than sellers. This could be due to good news about the company or investors expecting future growth. Whatever the reason, what drives the price is always the imbalance between supply and demand.

Prices are not determined by a single factor but by the combined effect of multiple factors:

Factors driving demand in the financial markets:

• Economic growth and low interest rates → Investors are eager to enter the stock market
• High liquidity in the lending system → More capital flows into the market
• Investor confidence → Positive future outlook increases demand

Factors driving supply in the financial markets:

• Company decision to raise capital → More shares in the market
• Share buyback policies → Fewer shares in circulation
• New companies IPO → Sudden increase in share supply

Supply and demand in trading and investing: Three practical approaches

1. Fundamental analysis: “The company’s story”

When good news comes out, large investors will want to buy that company’s stock, reflecting strong demand and causing prices to rise. Conversely, if news indicates the company is in trouble, sellers will increase their selling volume, increasing supply and pushing prices down.

Real-world examples:

• Company announces higher-than-expected profits → Buyers come in → Strong demand → Price rises
• Company announces poor results → Sellers increase → Supply increases → Price drops

2. Technical analysis: “Reading quantifiable numbers”

Candlestick charts show the battle between supply and demand over each time period:

• Green candlestick (Close higher than open) = Buyers win this round → Demand is strong
• Red candlestick (Close lower than open) = Sellers win this round → Supply is strong
• Doji (Open and close are close) = Indecision → No clear winner yet → Hesitation

Support & Resistance help identify points where supply and demand stall:

• Support = Area with many buyers waiting (Strong demand)
• Resistance = Area with many sellers waiting (Strong supply)

( 3. Trading momentum: “Demand Supply Zone models”

This technique looks at moments when price “breaks away” from equilibrium:

Example 1 – Reversal up )Demand Zone DBR(: Price drops sharply )Drop### → Creates a base area (Base) → Bounces up (Rally) with buyers at the top area. When price moves out of this range, traders can cut losses.

Example 2 – Reversal down (Supply Zone RBD): Price rises sharply (Rally) → Creates a top base (Base) → Moves down (Drop) with many sellers waiting.

Example 3 – Continuation up (RBR): Price advances (Rally) → Pauses in a range (Base) → Continues upward (Rally), demand remains strong.

Example 4 – Continuation down (DBD): Price drops (Drop) → Pauses in a range (Base) → Continues downward (Drop), supply remains strong.

What happens if demand exceeds supply?

The result is continuous price increases until a resistance level appears or investors see the price as too high. When that moment arrives, many sellers will come in to offer their shares, increasing supply and restoring balance. Often, prices will “spike” briefly before entering a correction phase.

This is why traders use support and resistance levels to time their selling rather than holding to see prices keep rising.

Summary: Why are supply and demand important?

Supply and demand are not just economic terms—they are the decision-making engine of investing. Once you understand how the market works, you’ll stop guessing and start creating plans based on price boundaries.

Whether you’re a fundamental analyst or a technical trader, understanding supply and demand will be the foundation that helps you grasp price movements in the financial markets more deeply. Studying real price data and repeatedly practicing applying these concepts will improve your market reading skills over time.