The meaning of demand and supply: The concepts that drive the market and investment decisions

If you are a serious investor trying to understand the stock market, you need to be familiar with the concept of “demand and supply,” which is the fundamental mechanism driving the price changes of all assets, whether stocks, currencies, or commodities.

This concept is not only alive in textbooks of economics but also appears in real life in the financial markets every day, every hour, through price fluctuations, trading activity, and the decisions of traders and investors.

The Meaning of Demand and Supply: A Simple Yet Comprehensive Definition

Demand (Demand) refers to the desire to buy goods or services at various prices. This means that at lower prices, buyers want more, but as prices rise, they reduce the quantity they want to purchase.

Supply (Supply) is the willingness to sell or the quantity of goods that sellers are willing to put on the market at different prices. The basic principle is opposite to demand: when prices are high, sellers are willing to sell more; when prices are low, selling activity diminishes.

When the demand and supply curves intersect at a certain point, that point is called equilibrium (Equilibrium) — the price and quantity that the market is satisfied with.

The Law of Demand: A Consistent Inverse Relationship

As prices increase, demand usually decreases. This is known as the “law of demand,” and it has two main reasons:

Income Effect: When prices fall, your real purchasing power (in terms of actual value) effectively increases, allowing you to buy more.

Substitution Effect: When a product becomes cheaper relative to other goods, consumers tend to buy this product instead.

Besides price, demand is also influenced by: consumer income, prices of related goods, tastes, the number of buyers in the market, future price expectations, seasons, government policies, and even psychological confidence.

The Law of Supply: Moving in the Same Direction

Supply works in the opposite way to demand. When prices rise, sellers are generally willing to supply more to gain higher profits. When prices fall, the quantity supplied decreases.

Factors affecting supply include: production costs, prices of alternative goods, competition levels, technology, price expectations, weather and natural disasters, tax policies, exchange rates, and access to capital.

Equilibrium and the Reason Prices Return to Balance

Demand or supply alone cannot determine prices; actual prices occur at the equilibrium point.

If prices rise above equilibrium, excess supply (Oversupply) occurs, with sellers holding inventory, which pressures prices downward back toward equilibrium.

If prices fall below equilibrium, shortages occur, with many buyers competing to purchase, which pushes prices upward again.

Therefore, demand and supply are key components in determining the price and trading volume of goods or services in the market.

The Meaning of Demand and Supply in Financial Markets: More Complex Than It Seems

In the stock market, stocks can be considered as “commodities,” but the factors influencing demand and supply are more complex and interconnected.

Key Factors Driving Demand in the Stock Market

• Macroeconomic Conditions: Economic growth, inflation rates, and interest rates. For example, when interest rates are low, investors seek higher returns in the stock market.

• Liquidity in the System: When more money circulates, investors have more capital to invest, boosting demand for risky assets.

• Confidence: Expectations about future economic conditions, corporate earnings, or political stability deeply influence investment decisions.

Factors Affecting Stock Supply

• Corporate Policies: Decisions to raise capital, buy back shares, or issue new stock directly impact the number of shares available.

• Initial Public Offerings (IPOs): New companies entering the stock exchange increase the supply of securities.

• Market Regulations: Conditions such as “Silent Periods” or restrictions on selling shares affect supply.

Fundamental Analysis: Viewing Demand and Supply from a Valuation Perspective

In fundamental analysis, investors do not just look at stock prices but ask: How much does the market want this company?

When good news comes out (such as better-than-expected earnings), demand for investment increases. Buyers are willing to pay higher prices, and sellers stop selling shares, causing prices to rise.

Conversely, when bad news emerges, buyers reduce their demand, and selling pressure increases, causing prices to fall.

Technical Analysis: Demand and Supply Illustrated with Candlestick Charts

Traders use various tools to observe buying and selling strength:

Candlestick Reading

Green Candlestick (Close higher than Open): Demand exceeds supply; buyers win.

Red Candlestick (Close lower than Open): Supply exceeds demand; sellers win.

Doji Candlestick (Open ≈ Close): Both sides are in balance; price movement is limited.

Trend Observation

When prices continually make new highs, demand remains strong, and prices are likely to continue rising.

When prices continually make new lows, supply remains strong, and prices are likely to continue falling.

Support and Resistance

Support (Support): A level where demand is waiting; investors see this as a good buying point.

Resistance (Resistance): A level where supply is waiting; investors are willing to sell to take profits.

Advanced Technique: Demand Supply Zone — Timing High-Level Trades

Professional traders use “Demand Supply Zones” to identify moments when prices are out of balance and likely to oscillate toward a new equilibrium.

Type 1: Reversal (Reversal)

Demand Zone Drop Base Rally (DBR): Price drops sharply due to strong supply, then halts as selling momentum wanes. Later, other factors cause buying to return strongly, and the price rebounds sharply.

Supply Zone Rally Base Drop (RBD): Price rises quickly due to strong demand, then pauses. When buying momentum diminishes and negative news appears, the price reverses sharply downward.

Type 2: Continuation (Continuation)

Demand Zone Rally Base Rally (RBR): Price moves upward in an uptrend, traders look for breakouts at resistance levels.

Supply Zone Drop Base Drop (DBD): Price declines in a downtrend, traders wait for breakouts at support levels.

Traders employing these techniques can more accurately time reversals and continuations.

The Broader Meaning of Demand and Supply: Long-Term Investment Decisions

Long-term investors should remember that demand and supply do not only affect today but also serve to accumulate factors over time.

Investor confidence in the “future” of a company influences broad demand. Economic programs, capacity expansions, large project completions, or access to new markets all drive demand higher and pressure stock prices to reflect higher intrinsic value.

Summary: Where Are Demand and Supply?

The fundamental meaning of demand and supply is the desire to buy and sell goods.

But in actual investing, they are the heartbeat of the market — the factors that drive prices, influence value, and distinguish successful investors from those who just participate without understanding.

Through study, experimentation, and diligent observation of real market prices, you will begin to see how this “buy and sell force” truly operates in each candlestick, each chart pattern, and every time investors collectively decide how much they want today.