The laws of supply and demand: their importance in market investing

In the world of investing, if you want to understand how stock prices move, you need to know the laws of supply and demand first. These two concepts are not just matters for economists; they are fundamental principles that help investors predict changes in market prices more accurately.

What is the law of supply and how does it relate to stock prices?

The law of supply explains that when the price of a product or security increases, sellers will want to offer more for sale. Conversely, when the price decreases, sellers will want to offer less. This is the core relationship between price and quantity supplied in the market.

Applying the law of supply to stocks means that when stock prices rise, many shareholders or investors see an opportunity to sell and realize gains because they believe the current price is high enough. During periods when prices fall, fewer sellers may want to sell at a loss.

What is (Demand)?

While the law of supply talks about the seller’s side, demand refers to the buyer’s side—the desire to purchase products or securities at various price levels.

When stock prices drop, many buyers see it as a good opportunity to buy, believing that the price is cheap and has value. During high price periods, demand tends to decrease as buyers may wait for prices to fall again.

Factors affecting demand in the financial market

• Macroeconomic conditions: interest rates, economic growth, and inflation rates
• Market liquidity: the amount of cash available in the financial system
• Investor confidence: trust in the future of the economy and corporate earnings
• Number of consumers: an increase in buyers leads to higher demand

Factors affecting supply in the financial market

• Corporate policies: decisions to raise capital, buy back shares, or announce significant information
• New listings: new companies entering the market via IPO
• Regulatory requirements: rules of the stock exchange affecting securities offerings
• Production costs: for companies producing tangible goods, higher costs may squeeze profits

Equilibrium: the point where prices are decided

(Equilibrium) occurs where demand and supply are equal. This is the point where market prices stabilize and are unlikely to change unless new factors intervene.

When stock prices rise above equilibrium, the number of sellers increases while buyers decrease, leading to excess supply and a price decline until a new equilibrium is reached.

Conversely, when prices fall too low, many buyers rush in while sellers hold back, resulting in excess demand and a price increase until a new equilibrium is established.

Applying supply and demand laws in technical analysis

Traders often use supply and demand principles through various technical tools:

1. Candlestick Analysis (Candle Stick Analysis)

A green candlestick (closes higher than it opens) indicates strong buying pressure, while a red candlestick (closes lower than it opens) shows strong selling pressure. If a doji candlestick (opens and closes near the same price) appears, it indicates a battle between buyers and sellers in balance.

2. Support & Resistance (Support & Resistance)

Support is a price level where buyers are waiting to buy, reflecting strong demand. Resistance is a level where sellers are waiting, indicating abundant supply. When prices break support or resistance, it suggests that the balance has shifted.

( 3. Demand Zone and Supply Zone )

This technique involves identifying points where price changes direction and waiting for the price to revisit areas of significant buying or selling activity. When the price returns, traders look for signals of reversal or continuation.

Trading application examples

Demand Zone Rally Base Rally (RBR): Price rises rapidly, then consolidates, and continues upward as buying momentum returns.

Supply Zone Drop Base Drop ###DBD(: Price drops sharply, forms a temporary base, then continues downward as selling pressure resumes.

Traders can set stop-loss points at the edges of these zones to manage risk.

Summary: Why is this important?

The laws of supply and demand are not just economic theories but real mechanisms that drive price movements in markets—whether in stocks, currencies, or other assets.

Once you understand how the laws of supply and demand work, you can better read market signals, identify potential turning points, and make smarter investment decisions. Continuous practice and genuine market understanding will help you become a better investor.