Do stock prices really go up and down? What factors influence them? What does supply mean?

When you observe the stock market, you will find that prices never stand still. They go up and down all the time. But what drives these changes is not some mysterious force. It is the fundamental forces that naturally operate in the market—namely, supply and demand. Understanding this concept may be the key to helping investors better time their buy and sell decisions.

Why do stock prices fluctuate?

In the world of finance, asset prices are not determined by complex formulas but by the confrontation of two parties: those who want to buy and those who want to sell. When buyers have more strength, prices go up. When sellers have more strength, prices go down. This phenomenon is called the equilibrium between supply and demand.

What does supply mean?

Supply refers to the quantity of goods or services that sellers are willing to offer at various price levels. When prices rise, sellers are generally willing to sell more. Conversely, when prices fall, they have less incentive to sell.

For example, in the stock market, when a company announces good news, most investors will want to hold onto their shares, leading to a (reduction in the supply of shares that shareholders are willing to sell). As no one wants to sell at the current price, the stock price tends to rise until it reaches a level where existing shareholders see it as worthwhile to sell.

What is demand?

Demand is the other side of the coin. It refers to the quantity of goods or services that buyers want to purchase at various price levels. When prices decrease, more buyers are interested in buying. When prices increase, demand tends to decrease.

In the stock market, when negative news occurs, investors become more worried. Many are willing to sell at lower prices. This causes supply to suddenly increase. Meanwhile, buyers hesitate to purchase, leading to a decrease in demand. The result is a clear decline in stock prices.

The rules of supply and demand that traders need to know

The law of demand

Understanding this law is quite straightforward: High prices = fewer buyers and low prices = more buyers.

This occurs due to two effects: first, the income effect—when prices fall, your money has more purchasing power, allowing you to buy more. Second, the substitution effect—when one stock’s price drops, it becomes a more attractive option compared to others, prompting buyers to switch to this stock.

The law of supply

This law works in the opposite direction: High prices = more sellers and low prices = fewer sellers.

Sellers tend to offer their shares when prices are favorable. If prices are low, they may delay selling and wait for prices to rise again.

The equilibrium point that determines the actual price

The actual price in the market is not random. It is the equilibrium point where the supply and demand curves intersect.

Imagine that when the price is above the equilibrium point, sellers are willing to offer more shares, but buyers are less interested. This results in excess supply, causing the price to fall until it reaches a point where both buyers and sellers are satisfied.

Conversely, when the price is below the equilibrium point, buyers want to purchase more shares than are available. This increased demand can push prices upward to encourage more sellers to enter the market.

When the system functions perfectly, prices tend to stick around this equilibrium point because no force is strong enough to push it away.

Factors that influence supply and demand in financial markets

What causes demand to change?

Economic conditions have a significant impact. When interest rates are low, investors tend to buy stocks for better returns, increasing demand.

System liquidity is also important. When banks have abundant funds to lend, more investors can buy stocks.

Investor confidence is perhaps the most critical factor. Good news about a company or the economy, political stability, or even optimistic sentiment can cause demand to spike immediately.

What causes supply to change?

Corporate policies have a direct effect. When a company announces a share buyback, the supply of shares in the market decreases, pushing prices higher. Conversely, issuing new shares increases supply.

New listings introduce new assets into the market, increasing overall supply and potentially affecting prices in the short term.

Market regulations also play a role. Restrictions on selling shares or IPO requirements can influence supply.

Applying supply and demand knowledge in practice

From a fundamental analysis perspective

Stock prices reflect the market’s opinion of a company. When good news emerges, investors are willing to pay more, indicating increased demand.

Fundamental factors such as quarterly earnings forecasts, business growth, or financial management influence how much we think a company is worth. Positive expectations increase demand; negative ones increase supply.

From a technical analysis perspective

Traders use various tools to detect changes in supply and demand.

Candlestick charts tell the story of market confrontation. A green candlestick (closes higher than it opens) indicates buyers won that day. A red candlestick (closes lower than it opens) indicates sellers dominated.

Price trends provide clues. If prices are making new highs, demand remains strong. If prices are making new lows, supply indicates there are still many sellers.

Support and resistance levels are points where supply and demand are in balance. At support, buyers are waiting to buy; at resistance, sellers are ready to sell. If prices break through these levels, it signals that the force in that direction has won.

Practical Demand and Supply Zone trading techniques

This technique involves identifying moments when prices start to move rapidly, then observing for consolidation before the next move.

( When the price is about to reverse )Reversal###

After a sharp decline (Supply Zone - DBR)
Prices fall quickly due to heavy selling (excess supply). Then, the market quiets down and begins to oscillate within a range, signaling that sellers are exhausted and buyers are starting to show interest. If a large Demand Supply Zone appears again, prices are likely to rise.

After a rally (Demand Zone - RBD)
Conversely, when prices rise after multiple attempts and continue upward, sellers start to reappear. When prices oscillate within a range and then decline, it indicates that supply is gaining control.

( When the price continues to move )Continuation###

Upward continuation (Demand Zone - RBR)
Prices rise, hit a resistance level, oscillate briefly, then continue upward. This suggests demand remains strong.

Further decline (Supply Zone - DBD)
Similarly, prices fall, oscillate, and then continue downward, indicating supply is still dominant.

Summary

Understanding what supply means and how it relates to demand is not just an economic theory. It is a real explanation of what happens in the markets every day.

For investors and traders, grasping this opens the door to understanding why prices go up, why they go down, and most importantly, when to buy or sell. Applying this knowledge to real market data will help you see the bigger picture and make smarter investment decisions.