Supply and demand: The key to understanding the investment market

When it comes to investing in the stock market, many traders and investors often hear the terms “demand” and “supply” frequently. However, many may still not fully understand how these two concepts influence price movements. This article will clearly explain how these fundamental principles are important for making investment decisions.

The Origin of Demand and Supply Concepts

In economics, the relationship between (Demand) and (Supply) forms the foundation of various price theories. This concept not only explains changes in the prices of goods in general but can also be applied to predict price movements in financial markets, including stock prices on stock exchanges.

The reason these concepts are important is that the prices we see in the market are actually the result of a balance between two opposing forces - the buyers and the sellers.

Demand: Market Buying Desire

Demand means the quantity of goods or services that consumers are willing to buy at different price levels. Analyzing this data reveals a fairly consistent pattern.

First Law of Demand

The relationship between price and quantity demanded works inversely: when prices rise, the quantity buyers want decreases, and vice versa.

This principle operates due to two key factors:

Income Effect (Income Effect) - When prices fall, the same amount of money can buy more goods, effectively increasing (Purchasing Power).

Substitution Effect (Substitution Effect) - When the price of a product drops, it becomes relatively more attractive compared to similar products, leading consumers to switch to buying this cheaper alternative.

Factors Affecting Demand

Besides price, other factors significantly influence demand:

• Buyers’ Income - As income increases, demand for goods tends to rise accordingly.
• Prices of Related Goods - The prices of substitutes or complementary goods affect purchasing decisions.
• Consumer Tastes and Preferences - Changing consumption trends over time and cultural influences.
• Number of Consumers in the Market - A larger market with more buyers results in higher overall demand.
• Future Price Expectations - If consumers expect prices to rise in the future, they may rush to buy now.

Additionally, external factors such as seasons, government policies, and technological developments also influence purchasing decisions across different periods.

Supply: Producers’ Willingness to Sell

Supply refers to the quantity of goods that producers or sellers intend to offer for sale at different price levels. Similar to demand, it operates in the same direction as price.

First Law of Supply

The relationship between price and quantity supplied works directly: when prices increase, producers are willing to supply more because expected profits are higher.

Factors Affecting Supply

• Production Costs - If raw materials, labor, or energy costs increase, producers’ willingness to supply decreases.
• Technology - Advances in technology can reduce costs and increase production capacity.
• Number of Producers - More competitors in the market lead to higher total supply.
• Future Price Expectations - If producers expect higher prices later, they might reduce current production to sell at better prices.
• Environmental Conditions and Government Policies - Weather, tax policies, and environmental regulations all impact production capabilities.

Market Equilibrium: The Point Where Demand Meets Supply

The prices we observe in the market are not random but result from the interaction of these two forces. When the demand and supply curves intersect at a point called (Equilibrium), the market is in balance.

At this equilibrium point, prices and quantities tend to stabilize because:

When prices are above equilibrium:

• Producers are willing to sell more
• Consumers buy less
• Surplus occurs, called “oversupply”
• Price pressures push prices downward toward equilibrium

When prices are below equilibrium:

• Consumers want to buy more
• Producers are willing to sell less
• Shortage occurs
• Price pressures push prices upward toward equilibrium

Demand and Supply in Financial Markets

When looking at stock markets and general financial markets, the principles of demand and supply still apply, but the influencing factors become more complex.

Factors Affecting Stock Demand

Macroeconomic Conditions - Economic growth, inflation rates, and interest rates all influence investment decisions. For example, when interest rates are low, investors tend to seek higher returns in the stock market.

Liquidity - The amount of money available in the financial system affects the capacity and willingness to invest.

Investor Confidence - Expectations about the future, corporate earnings, or political stability significantly impact investment choices.

Factors Affecting Stock Supply

Corporate Policies - Decisions to raise capital, buy back shares, or issue new IPOs affect the number of shares available in the market.

Market Regulations - Policies from stock exchanges and regulatory bodies, such as restrictions on post-IPO sales, influence share liquidity.

Applying These Concepts in Price Analysis

Demand and Supply in Fundamental Analysis

When investors discuss stock price movements, many refer to demand and supply forces.

• Price increases indicate that (buying pressure) exceeds selling pressure.
• Price decreases suggest that (selling pressure) exceeds buying interest.

From a fundamental analysis perspective, investors consider factors like expected profits, revenue growth, and macroeconomic variables to estimate what the stock price should be. When the market price is below this estimate, it indicates that demand is insufficient, presenting a potential buying opportunity.

Demand and Supply in Technical Analysis

Technical traders use various tools to study demand and supply forces:

1) Candlestick Analysis

• Green candles (Close > Open): indicate strong demand
• Red candles (Close < Open): indicate strong supply
• Doji (Open ≈ Close): suggest balance between forces

2) Trend Analysis

• Prices making higher highs: demand dominates supply (Uptrend)
• Prices making lower lows: supply dominates demand (Downtrend)
• Price moving sideways within a range: equilibrium between forces

3) Support and Resistance Levels

• Support: price level where demand is expected to be strong enough to prevent further decline; traders anticipate buying interest
• Resistance: price level where supply is expected to be strong enough to prevent further rise; traders anticipate selling interest

Demand Supply Zone Trading Techniques

Many traders utilize the Demand Supply Zone technique, which combines demand and supply principles with technical analysis.

Reversal Trading (Reversal)

Demand Zone Drop Base Rally (DBR)

• Price drops (Drop): strong selling pressure
• Price consolidates in a base (Base): battle between forces
• Price reverses upward (Rally): buying interest emerges, especially on breakout

Supply Zone Rally Base Drop (RBD)

• Price rallies (Rally): strong buying interest
• Price consolidates in a base (Base): battle between forces
• Price reverses downward (Drop): selling pressure, especially on breakout

Trend Continuation Trading (Continuation)

Rally Base Rally (RBR)

• Continuous upward movement, demand remains strong

Drop Base Drop (DBD)

• Continuous downward movement, supply remains strong

Summary

Demand and supply are not just dry economic theories but fundamental mechanisms that drive daily financial markets. By understanding and observing these forces, you can improve your ability to predict price movements.

For investors using platforms like Gate.io, practicing demand and supply analysis can enhance decision-making accuracy, whether for long-term investing or short-term trading. These concepts are valuable tools in your trading arsenal.

The key is to apply this knowledge practically to real market prices. Continuous practice and observation will help you become a successful trader.