Why do investors need to understand "What does supply mean" and its relationship with demand

Have you ever wondered why stock prices close higher in the morning but plummet in the afternoon? Despite good news released in the afternoon, prices may not rise. Such strange phenomena in the market all have answers rooted in the simplest economic principles: the relationship between demand and supply.

However, many investors still do not understand how these two fundamental forces work and how they can help us better predict price directions. This article will reveal the mystery behind this to help you apply it effectively in your investments.

The Two Forces That Determine Price: Demand and Supply

First, you need to understand what demand means and how it differs from supply.

In the market, there are products ( including stocks ) of the same set, but two groups of people think differently: one wants to buy, the other wants to sell.

Demand ( - The buying force that drives the market

Demand does not mean a simple desire to buy, but the desire at different price levels. For example, at 100 baht, there are 1,000 shares people want to buy; at 110 baht, perhaps only 500 shares.

Plotting this data on a graph yields the )Demand Curve(, which slopes downward, reflecting the basic rule that higher prices → lower demand and lower prices → higher demand.

Why is this?

1) Income Effect ): When prices drop, your wallet feels more valuable, so you can buy more with the same amount of money.

2( Substitution Effect ): When this stock’s price drops, it looks more attractive than other stocks, so you prefer to buy more of this one.

Factors driving demand beyond price include:

• Consumers’ income: When the economy is good, people have more money to invest.
• Confidence: Will this company continue to grow? It affects investor sentiment.
• Seasonality and trends: Construction materials are in higher demand during the rainy season.
• Future price expectations: If investors believe prices will rise further, they rush to buy today.

) Supply ( - The other side of the equation

Supply is the willingness to sell, the opposite of demand. When the price is 100 baht, sellers might be willing to sell 500 shares; at 110 baht, they might be willing to sell up to 1,000 shares.

The )Supply Curve### slopes upward, reflecting that higher prices → increased willingness to sell and lower prices → decreased willingness to sell.

Sellers’ natural response is straightforward: if the price is good, they sell more; if the price is scary, they hold back.

Factors influencing supply changes:

• Production costs: If wages increase, production becomes more expensive, so sellers are less willing to sell.
• Technology: New technology reduces costs → supply increases.
• Government policies: Higher taxes → higher costs → sellers hold back.
• Expectations: If prices are expected to rise further, sellers may hold back to sell later.

( Equilibrium Point ) - Where the market stabilizes

Demand and supply are opposite sides, but both originate from equal forces at a certain point: the (Equilibrium) where the two lines intersect.

At this point:

• The quantity buyers want = the quantity sellers offer
• The resulting price = the price both parties are satisfied with
• The market is in balance; prices are relatively stable

However, this equilibrium can change as new factors influence the market.

If prices rise above equilibrium:

• Sellers see good prices and increase selling
• Buyers see high prices and reduce buying
• Excess supply → sellers lower prices → prices return to equilibrium

If prices fall below equilibrium:

• Buyers see low prices and increase buying
• Sellers see low prices and reduce selling
• Shortage occurs → buyers push prices up → prices return to equilibrium

Financial Markets: Demand and Supply Are More Complex

In stock and financial asset markets, demand and supply have more specific characteristics.

What haunts demand in financial markets?

1( Market Liquidity ):

• Abundant money in the system → people have funds to trade → demand increases
• Limited money → no funds to invest → demand decreases

2### Interest Rates ):

• Low interest rates → saving yields little → better to invest in stocks
• High interest rates → prefer bank deposits → less interest in stocks

3( Investor Confidence ):

• Growing economy, rising profits → more buyers
• Bad situation, increased fear → more sellers

) What determines supply in the stock market?

1) Company Policies ###:

• Stock buybacks → reduce shares in circulation → supply decreases
• New capital issuance → increase shares → supply increases

2) Entry into New Markets )IPO(:

• New companies go public → more shares available → supply increases

3) Market Regulations ):

• Silent periods after IPOs → major shareholders must wait to sell → supply decreases

Why Do Traders Need to Know This?

From a fundamental analysis perspective (Fundamental Analysis)

Price movements are not caused by mysterious forces but by buying and selling pressures.

• Price rises = demand exceeds supply (Demand > Supply)
• Price falls = supply exceeds demand (Supply > Demand)

Fundamentally, these forces stem from valuation assessments of the company.

• Good news → investors are convinced → willing to pay higher prices → strong buying pressure
• Better-than-expected earnings → target prices rise → demand surges
• Bad news → investors become fearful → rush to sell → strong selling pressure

From a technical analysis perspective (Technical Analysis)

Good technical analysis focuses on price movements to interpret buying and selling forces.

1) Price Action - Reading Candlesticks (:

• Large green candlestick: buying is in control
• Large red candlestick: heavy selling
• Doji )Doji): indecision, neither side dominates

2) Trend Analysis - Following the trend (:

• Higher highs: demand remains strong, uptrend continues
• Lower lows: supply dominates, downtrend continues
• Sideways movement: unclear, wait for breakout

3) Support & Resistance (:

• Support = demand zone )people want to buy(
• Resistance = supply zone )people want to sell(

Practical Strategy: Demand Supply Zone Trading

A popular technique called Demand Supply Zone involves identifying points where prices drop or surge rapidly )extreme movements###, then consolidating before a breakout.

( Example 1: Uptrend )Demand Zone Rally-Base-Rally, RBR(
Prices shoot up like a rocket )strong buying( → pause for consolidation )new negotiations### → breakout higher

Traders buy when prices break above the consolidation zone, confirming the uptrend.

( Example 2: Downtrend )Supply Zone Drop-Base-Drop, DBD(
Prices fall sharply )supply enters( → pause briefly )then continue falling → further decline

Traders sell when prices break below the consolidation zone.

Conclusion

What does supply mean? It signifies half of the big picture in understanding the market. The other half is demand.

Anyone who understands both well can see what the market is doing, what is happening, and where it is heading.

Practicing chart analysis, observing real movements, and continuous learning will gradually develop your skills into those of a professional investor.