Why do stock prices fluctuate? Understanding supply and demand for traders

If you’ve ever wondered why stock prices fluctuate, why sometimes they surge dramatically, and other times they plummet sharply, the answer lies in this small concept — Supply and Demand in the financial markets. This idea is not just a theoretical economic concept sitting in textbooks; it is a real force that drives every movement of prices we see every day.

Market Phenomena: When Do Supply and Demand Actually Occur?

Throughout each day, consumers, investors, and entrepreneurs make decisions on whether to buy or sell. When many people want to buy and release funds, the price of the asset, or in this case, stocks, will rise. Conversely, when many want to sell stocks simultaneously, the price will fall. These fluctuations result from the imbalance between (demand) and (supply).

###What does demand mean?

Demand in simple terms is the desire to buy. When investors find a stock appealing, they want to purchase it and are willing to pay to acquire it. The number of people wanting to buy and the volume they wish to purchase constitute demand.

In the financial markets, demand does not arise from the actual need for the product but from faith in the company’s profits, growth forecasts, or even hope that the stock price will go higher. When interest rates decrease, many investors shift their investments into stocks for better returns instead of saving money, which increases demand for stocks accordingly.

###What does supply mean?

Supply refers to the quantity of stocks that sellers are willing to release. Typically, when stock prices rise, many shareholders are happy to sell to realize profits, increasing supply as prices go higher. Conversely, when prices are low, sellers hold back, waiting for prices to rebound, which reduces supply.

Additionally, new companies entering the stock market via IPOs or capital increases also affect supply because the total number of shares in the market increases.

Equilibrium Point: Where Price is Fair

When demand and supply meet, they form a point called (Equilibrium). This is the price at which buying and selling are perfectly balanced.

If the price moves above this point, a “surplus” occurs — many sellers want to sell but buyers are hesitant, causing prices to adjust downward to attract buyers again. Conversely, if the price drops below the equilibrium point, a “shortage” occurs — many buyers but not enough sellers, leading prices to rise again.

Factors Driving Demand in the Stock Market

The desire to buy stocks does not happen randomly; it has clear reasons:

Macroeconomic Factors: When the economy is doing well and profits are easy to come by, people want to invest more, increasing demand. Conversely, during economic downturns and crises, demand decreases.

Interest Rates: When central banks lower interest rates, savings yield less return, prompting investors to seek better yields in stocks, thus increasing demand.

Investor Confidence: News acts like a change of heart. Good news encourages buying, while bad news prompts selling.

Market Liquidity: When there is plenty of money in the market, investors have more capital to invest.

Factors Driving Supply in the Stock Market

The number of stocks people want to sell depends on several factors:

Corporate Decisions: Companies may decide to raise capital by issuing new shares or buy back shares, reducing or increasing supply accordingly.

New Market Listings: When new companies go public via IPOs, the total share volume in the market increases.

Production Costs: If costs are high, companies might be reluctant to produce more or issue new shares.

Technology: New technological advancements can create new industries, increasing supply, or make existing industries obsolete, reducing supply.

Applying These Concepts in Trading

Understanding supply and demand is not just theoretical; traders and investors use it to make money.

( Fundamental Analysis

When you see a stock with high demand )more demand than supply###, it indicates strong buying pressure, and prices tend to go up. Conversely, when stocks are abundant (more supply than demand), with many sellers and few buyers, prices tend to fall.

Fundamental investors look at a company’s (value), such as earnings, growth potential, and management. If they believe the company will grow well, demand increases, pushing prices higher.

( Technical Analysis

Technical traders use price charts to read signals of supply and demand.

Candlesticks: Green candles )closing higher than opening### indicate demand dominance; red candles (closing lower than opening) indicate supply dominance; doji candles (opening and closing are close) show indecision.

Trend: If prices make new highs consistently, demand is strong; if they make new lows, supply is strong.

Support & Resistance: Support is where buyers are waiting and believe the price is attractive; resistance is where sellers are ready to sell and expect the price to stop rising.

Demand Supply Zone Technique: Catching the Moment

A popular technique applying supply and demand is the Demand Supply Zone, which involves identifying points of imbalance and predicting when prices will return to equilibrium.

( Pattern 1: Reversal )Reversal(

Demand Zone Drop Base Rally )DBR(: Price drops sharply )Drop### due to excess supply, then consolidates (Base). When buying resumes, price rises (Rally), and traders enter at breakout points.

Supply Zone Rally Base Drop (RBD): Price rises sharply (Rally) due to strong demand, consolidates (Base), then drops (Drop) when selling resumes, with traders entering at the lower breakout.

( Pattern 2: Trend Continuation )Continuation(

Rally Base Rally )RBR(: Price rises, consolidates, then continues upward, reflecting strong demand.

Drop Base Drop )DBD###: Price drops, consolidates, then continues downward, indicating persistent supply.

When Price Is Not Determined

Sometimes, prices do not move significantly but fluctuate within a range. This signals a balance between supply and demand. When this happens, traders should wait for new factors, such as news or shifts in confidence, to trigger a breakout.

Summary of Demand and Supply

Demand and supply are not just distant economic concepts but are forces that drive the markets every day. A deep understanding of the factors that determine demand and supply, along with technical techniques to identify them, is key to predicting prices. Whether you are a fundamental investor or a technical trader, training yourself to recognize demand and supply on real asset price charts is a valuable skill for making sustainable investment decisions.