From Theory to Investment: Demand and Supply Explaining Asset Price Movements

Why Investors Need to Understand Supply and Demand

When you observe stock or digital asset price charts going up and down throughout the day, you are essentially witnessing the expression of supply and demand at that moment. What appears to be random movement is actually governed by economic principles. Understanding these principles will help you read the market more systematically.

Supply and demand are not just economic concepts discussed by the masses. They are applied daily in analyzing stock prices, currencies, consumer goods, and even digital assets in financial markets. Studying this may seem dense at first, but once you see real-world applications, it becomes immediately clearer.

Supply and Demand Play a Crucial Role in Price

Demand (: The desire to buy that drives prices

When we talk about demand, we refer to the desire to purchase goods or services at various prices. If you plot this on a graph, the relationship between price and the quantity buyers want is called the )Demand Curve(.

Key Principle of Demand: High price = lower quantity demanded, and low price = higher quantity demanded. This is driven by two main effects:

1. Income Effect )Income Effect(: When prices fall, your purchasing power increases, allowing you to buy more.
2. Substitution Effect )Substitution Effect(: If a product becomes more expensive, you may choose an alternative. If it becomes cheaper, you might switch to it.

Factors that influence demand:

• Consumer income
• Prices of related goods
• Tastes and market trends
• Number of buyers in the market
• Future price expectations
• External factors such as seasons, government policies, or market confidence

) Supply ###: The willingness to sell that often appears in the market

If demand is the side of buyers, supply is the side of sellers. It is the quantity of goods that sellers are willing to offer at various prices. When plotted, this forms the (Supply Curve).

Law of Supply: Opposite to demand, high price = increased quantity supplied, and low price = decreased quantity supplied, because sellers are more willing to sell at higher prices.

Factors that determine supply:

• Production costs
• Technology and production efficiency
• Prices of alternative goods producers can choose to produce
• Number of producers in the market
• Future price expectations
• External factors like weather, regulations, and other external influences

( Equilibrium ): The point where supply and demand intersect

Where do the demand and supply curves meet? That’s the equilibrium point, which is the “must-be” price for stocks or assets because:

• If the price is above equilibrium: Sellers increase supply, buyers reduce demand → surplus → price drops
• If the price is below equilibrium: Buyers want to buy more, sellers reduce supply → shortage → price rises

Prices tend to be “pulled” back toward equilibrium continuously.

How Supply and Demand Work in Financial Markets

Demand in Financial Markets

The demand for stocks or digital assets increases when:

• Economic indicators are good: GDP rising, low interest rates make investors seek returns from stocks
• Liquidity is abundant: When there’s plenty of money in the market, investors are willing to invest in risky assets
• Market confidence is high: Good news, strong earnings, or optimistic future outlooks for companies all boost demand

( Supply in Financial Markets

The quantity of stocks available in the market changes due to:

• Corporate policies: Share buybacks )Buyback### = reduced supply vs. issuing new shares = increased supply
• New companies entering the market: IPOs increase supply
• Market regulations: Restrictions like lockup periods = temporary reduction in supply

Viewing Stock Prices Through the Lens of Supply and Demand

From a Fundamental Perspective (Fundamental)

When stock prices rise, it indicates demand exceeds supply. Buyers are supporting the price because they believe the company is worth buying or will grow in the future.

When prices fall, it indicates supply exceeds demand. Sellers are exiting because they see risks or find the stock less attractive.

From a Technical Perspective (Technical)

1. Candlesticks ###Candles(:

   • Green candle = close higher = buying pressure wins
   • Red candle = close lower = selling pressure wins
   • Doji = open = close = same price = indecision, no clear winner

2. Trend )Trend(:

   • Higher highs = demand remains strong, price likely to go up
   • Lower lows = supply remains strong, price likely to go down
   • Moving sideways = equilibrium, uncertain direction

3. Support & Resistance )Support & Resistance(:

   • Support = area where buyers tend to step in )Strong demand(
   • Resistance = area where sellers tend to step in )Strong supply(

Using Supply and Demand Zones in Trading

A popular technique is the “Demand Supply Zone,” which identifies points where the price moves rapidly )Drop or Rally(, creating large candlesticks. Afterward, the price consolidates and forms a base )Support( near the balance point between buying and selling. When new news or factors emerge, one side gains dominance, breaking out of the zone.

) Reversal Patterns (:

DBR )Drop-Base-Rally###: Price plunges → forms a base → reverses upward → breaks resistance to buy RBD (Rally-Base-Drop): Price rises → forms a base → reverses downward → breaks support to sell

( Continuation Patterns ):

RBR (Rally-Base-Rally): Price rises → forms a base → continues upward → breaks resistance to buy DBD ###Drop-Base-Drop(: Price drops → forms a base → continues downward → breaks support to sell

General Factors Affecting Both Sides

When the economy is doing well, demand increases. Companies are rotating profits, and with new IPOs, supply also increases. The market often reacts in complex ways, and a new equilibrium is found at a new price level.

Summary: Supply and Demand as Tools

Supply and demand are not just theories sitting in books but are alive in real markets. Every day, as prices move, they reflect the ongoing battle between buying and selling interests.

For investors, understanding these components is about learning to “read” the market, not misinterpret or guess randomly. Combining theoretical knowledge with real price observation will help you see market movements systematically and ultimately make more informed investment decisions.